Suppose that an economy is originally under the medium equilibrium and the government has a large deficit. Now, the government announces that it will conduct the policy of fiscal consolidation by increasing taxes permanently. Assume that changes of taxes do no change the country's Yn. Use the IS-LM-PC model (with = ) to discuss the possible effects of this policy on output and real interest rate in the current period when people take expectation on the medium run and long run into account. e Hints: 1. In the medium-run equilibrium, real interest rate must adjust to keep output equal to Yn. 2. Think about whether IS curve in the current period will shift to the right or left.