Suppose current government spending increases and that individuals expect future government spending to increase. Given this information, in which of the following cases will output in the current period be more likely to decrease?
A) Individuals consider only the short- run effects of changes in future macro variables when forming expectations of future output and future interest rates.
B) Individuals consider only the medium- run effects of changes in future macro variables when forming expectations of future output and future interest rates.
C) Individuals consider only the long- run effects of changes in future macro variables when forming expectations of future output and future interest rates.
D) The output effects will be the same in A and B.
E) The output effects will be the same in B and C.

Question

Quizplus · Accepted Answer

In the long run, individuals will adjust their behavior and expectations based on the increased government spending, which may lead to higher interest rates and inflation. This can decrease output in the short run due to reduced investment and consumption. In the short or medium run, individuals may not fully adjust their behavior and expectations, leading to less impact on output. Therefore, considering only the long-run effects will more likely result in decreased output.

Suppose Current Government Spending Increases and That Individuals Expect Future