Suppose Current Government Spending Decreases and That Individuals Expect Future

question 30

Multiple Choice

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 decrease?

• 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 A and C.
• E) The output effects will be the same in B and C.