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 increase?
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 C.
E) The output effects will be the same in B and C.

Question

Quizplus · Accepted Answer

When individuals focus on the short-run effects of changes in future macro variables, they are more likely to adjust their current spending and investment in response to current government spending increases. This immediate reaction can lead to a more significant increase in current period output compared to scenarios where individuals focus on medium or long-run effects, as those might lead to more cautious or delayed responses.

Suppose Current Government Spending Increases and That Individuals Expect Future