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 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

If individuals are only considering the short run effects of changes in future government spending when forming expectations of future output, they may cut back on consumption and investment in the current period, anticipating a decrease in government spending in the near future. This could lead to a decrease in current output. In contrast, if individuals are considering the medium or long run effects, they may not adjust their behavior as much in the current period, leading to a smaller or no decrease in output.

Suppose Current Government Spending Decreases AND That Individuals Expect Future