Assume Individuals Consider Only the Long- Run Effects of Changes

question 53

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 increase. Given this information, individuals will expect:

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

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Definitions:

Predetermined Overhead Rate

A rate used to allocate manufacturing overhead costs to products, calculated before the period begins based on the relationship between estimated overhead costs and an allocation base.

Variable Manufacturing Overhead

Costs that vary with production volume, such as utilities and indirect materials.

Machine-Hours

A measure of the time that a machine is operated, used as a way to allocate machine-related costs to products.

Fixed Manufacturing Overhead

Indirect and constant production costs that are not affected by the level of goods or services produced, including factory rent, salaries of supervisory personnel, and utility costs.