Suppose current government spending decreases and that individuals expect future government spending to decrease.Given this information,in which of the following cases will output in the current period be more likely to increase?

Question

Quizplus · Accepted Answer

In the long run, the decrease in government spending will lead to lower interest rates, which will in turn stimulate investment and increase output. In the short run, the decrease in government spending might lead to a decrease in output due to lower aggregate demand, while in the medium run the effect is ambiguous and depends on other macroeconomic factors. Therefore, individuals considering only the long-run effects of changes in future macro variables will be more likely to expect an increase in output.

Suppose Current Government Spending Decreases and That Individuals Expect Future