Question 3 (25 points) - Topics 8, 9 & 10

The following question's sub-parts are completely separate questions. a) Some economists claim that the government should always use monetary policy to stabilize (or target) the real interest rate in the short-run if they also wish to keep the resulting impact on (changes to) the government budgetary balance to a minimum. Is this claim true, false or uncertain? Explain by using words and one IS/LM diagram. (5 points)

b) The government should always use monetary policy to combat the effect of business cycle fluctuations coming from COVID-19 induced changes in autonomous consumption if it wishes to keep movements in unemployment & investment to a minimum. Is this claim true, false or uncertain? Explain by using words and a single IS/LM diagram. (10 points)

c) The government should never use fiscal policy to combat business cycle fluctuations coming from COVID-19 induced changes in money demand if it also wishes to keep longer term movements in the price level to a minimum. Is this claim true, false or uncertain? Explain by using words and a single AS/AD diagram. (10 points)