The medium-run equilibrium is characterized by four conditions: Output is equal to potential output Y = Y and the real policy rate I must In be chosen by the central bank so: The unemployment rate is equal to the natural rate u = Un. The real policy interest rate is equal to the natural rate of interest rn where In is defined as the policy rate where Y = C (Y T) + I(Yn, Fn + x) + G. - The expected and actual rate of inflation is equal to the anchored or target rate of inflation. This implies the nominal policy rate i = In + . a. If the level of expected inflation is formed so equals , characterize the behavior of inflation in a medium-run equilibrium. b. Write the IS relation as Y = C(Y T) + I(Y, r + x) + G. Suppose In is 2%. If x increases from 3 to 5%, how must the central bank change In to maintain the existing medium-run equilibrium. Explain in words. c. Suppose G increases permanently. In what direction must the central bank change r to maintain the existing medium-run equilibrium? Explain in words. d. Suppose T decreases permanently. In what direction must the central bank change r to maintain the existing medium-run equilibrium? Explain in words. e. Discuss: In the medium run, a fiscal expansion leads to an increase in the natural rate of interest.