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 B and C.

Question

Quizplus · Accepted Answer

When individuals focus on the long run effects of changes in future macro variables, they may anticipate higher taxes or reduced private investment due to increased government borrowing. This can lead to decreased consumption and investment in anticipation of future economic conditions, potentially decreasing output in the current period.

Suppose Current Government Spending Increases and That Individuals Expect Future