Choose 3 out of 4 statements below and determine if they are true or false. Justify your answer. a) For a large open economy, an increase in government deficit will lower interest rates and increase capital inflow (NFA). Explain using an investment and savings graphs for the large open economy and the rest of the world. b) Suppose the economy is initially in long run equilibrium. A major cyclone wipes out a third of its capital stock. Without any government action, in the short run output will decline and so will interest rates. Explain using an IS-LM-FE graph. c) An unexpected monetary contraction will cause immediate deflation and decline in output both in the short and long run. Use the AS-AD model to explain. Assume the economy starts initially at full employment. d) If Congress raises taxes, but the Fed wants to hold output constant, then the Fed must increase the money supply. Explain using money/asset market graph and the IS-LM-FE model