"Mi brynodd hi lolfa newydd."
Translation:She bought a new lounge.
'Mi brynodd hi' is the North Wales version of 'Prynodd hi' she bought. In North Wales all the short tenses (as opposed to the ones using the verb to be, eg I will ran and I will be running) use the affirmative 'Mi' at the beginning of the sentence.
So to answer your question the 'mi' is not related to the pronoun 'hi' in the sentence.
Lounge and living room both mean the same thing in English in this context as a noun describing a room in a domestic house. In houses with two of these rooms one would often be kept more formal and used to entertain guests while the other is used by the family, the more formal room would be referred to as the lounge.
Pubs also used to be split into a bar and a lounge where the lounge was typically more comfortable, often served food and had more seating as opposed to a few stools, bar snaks and bar games, it was common for women to only be allowed in the lounge of a public house.
There is another use for lounge which is a verb meaning to sit or lie in a lazy or relaxed manner, which i think is where the room gets it's name.
I do sort of get the difference between "lolfa" and "ystafell fwy" in Welsh, but I do think that "lounge" and "living room" should be accepted interchangeably in the English translations. I honestly think that community/regional differences might be at play here. I have some family and friends in the USA, for example, who pretty much only ever use the term "lounge", whereas I and my other close family and friends here in the West Midlands pretty much only ever use the term "living room".