Assume individuals consider only the medium-run effects of changes in future mac

Question

Assume individuals consider only the medium-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 an ambiguous effect on expected future output.

d. an increase in the expected future interest rate and a reduction in expected future output.

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

Explanation / Answer

Ans)

d. an increase expected future interest rate and reduction in expected future output.

We know that if the current government spending increases and that individuals expect future government spending to increase then future expected output will decrease.

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