Assume individuals consider only the short-run effects of changes in future macr

Question

Assume individuals consider only the short-run effects of changes in future macro variables when forming expectations of future output and future interest rates. Suppose individuals expect future government spending to increase. Given this information, individuals will expect:

Select one:

a. an increase in the expected future interest rate and no change in expected future output.

b. an increase in the expected future interest rate and an increase in expected future output.

c. an increase in the expected future interest rate and a decrease in expected future output.

d. an increase in the expected future interest rate and an ambiguous effect on expected future output.

e. an increase in the expected future interest rate and a constant expected future output.

7Can anyone help me explain that thanks!

Explanation / Answer

b. an increase in the expected future interest rate and an increase in expected future output. : More expenditure by government can happen in two ways - one is consumption expenditure and the other investment. When investment by government is high , there will be ancilliary investments by private sector which will required more fund from market which will in turn increase the interest. When more people participate in productive activity, the output will increase.

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