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?
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

In the long run, individuals will have adjusted their behavior and investment decisions based on the expectation of decreased government spending, leading to an increase in output. In the short run and medium run, individuals may not have fully adjusted to the changes in government spending, leading to a weaker effect on output. Therefore, considering only the long run effects of changes in future macro variables when forming expectations of future output and interest rates is the best choice for an increase in current period output.

Suppose Current Government Spending Decreases AND That Individuals Expect Future