Assume individuals consider only the short- run effects of changes in future macro variables when forming expectations of future output and future interest rates. Suppose individuals expect future government spending to increase. Given this information, individuals will expect:
A) an increase in the expected future interest rate and no change in expected future output.
B) an increase in the expected future interest rate and an increase in expected future output.
C) an increase in the expected future interest rate and a decrease in expected future output.
D) an increase in the expected future interest rate and an ambiguous effect on expected future output.
E) an increase in the expected future interest rate and a constant expected future output.

Question

Quizplus · Accepted Answer

An expected increase in future government spending typically leads to expectations of higher future output due to increased demand. Additionally, it can lead to higher expected future interest rates as the government may borrow more, increasing demand for loanable funds.

Assume Individuals Consider Only the Short- Run Effects of Changes