a ) What are the conditions that characterize the medium - run equilibrium ?"

Suppose & medium - run equilibrium in an economy in a given year , say 2017 where actual and

expected inflation equals 3%/}.

b ) Assume that there is a significant increase in investor and consumer confidence in 2018.

How would the IS curve shill , assuming that the central bank does not change the real policy

rate ?' With a graphical illustration compare and comment on the equilibria in 2017 and 20187

C ) Consider the year 2019 equilibrium under the assumption that Izois = Itzpig . If the central

bank does not change the real policy rate , how would actual inflation change in 2019 ?

Compare it to that in 2018? How can the central bank keep the real policy rate unchanged ?"

With the same assumption about the expected inflation and interest rate , how would actual

inflation change in 2020 7 Compare it to that in 2019 .

*) Consider the year 2019 equilibrium again but with the assumption that Itzorg = IT . If the

central bank does not change the real policy rate , how would actual inflation change in 2019 !

Compare it to that in 2018? How can the central bank keep the real policy rate unchanged ?"

With the same assumption about the expected inflation and interest rate , how would actual

inflation change in 2020 7 Compare it to that in 2019 .

e ) Compare the inflation and output outcomes in scenarios presented in ( c ) and ( d) . Which

scenario looks more realistic to you ?" Discuss .

1) Suppose year 2021 , the central bank increases the real interest rate high enough to return

the economy to back potential output and to the rate of inflation in 2017 . Explain the

differences between central bank policies under the same assumptions about expected

inflation in ( c ) and ( d ) where

where ME = It - 1 and IT{ = IT , respectively .