Assume Individuals Consider Only the Long- Run Effects of Changes

question 24

Multiple Choice

Assume individuals consider only the long- 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 decrease. Given this information, individuals will expect:

• A) a decrease in the expected future interest rate and no change in expected future output.
• B) a decrease in the expected future interest rate and an increase in expected future output.
• C) a decrease in the expected future interest rate and a decrease in expected future output.
• D) a decrease in the expected future interest rate and an ambiguous effect on expected future output.
• E) a decrease in the expected future interest rate and a constant expected future output.

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Definitions:

Accrual Method

An accounting method that records revenues and expenses when they are earned or incurred, regardless of when the cash is received or paid.

Installment Sales Method

The installment sales method is an accounting technique used to recognize revenue and income on sales made through installment payments over time.

Intraperiod Tax Allocation

The process of allocating income taxes within a single financial reporting period, dividing the total tax expense among different parts of the financial statements.

Extraordinary Gain

Profits that arise from events that are unusual, infrequent, and not expected to recur in the foreseeable future.