3. (Note: You should wait to tackle this question until after lecture on Thursday, No Suppose that the economy is initially in long-run equilibrium: output is at potential and inflation is steady. Now, suppose there is a permanent upward shift of the Federal Reser function. a. What does this upward shift in the reaction function imply about the Fed target for the rate of inflation? b. What does the change in the reaction function imply that the Fed wil nominal interest rate and to the real interest rate in the short run? Describ the Fed could do to bring about this change in interest rates. c. What will be the short-run effect of the shift in the reaction function on G d. Describe briefly how GDP returns to its potential level. (Hint: What will inflation after a while? How will the Federal Reserve respond to that?)