Assume Individuals Consider Only the Short- Run Effects of Changes

question 6

Multiple Choice

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 the central bank to pursue monetary expansion in the future. Given this information, we know with certainty that:

• A) the current interest rate effects are ambiguous.
• B) current output will decrease.
• C) the current output effects are ambiguous.
• D) current output and the current interest rate will both increase.
• E) the current interest rate will decrease.

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Definitions:

Supply

The total amount of a good or service that producers are willing and able to sell at a given price over a certain period.

Consumer Surplus

The rift between what consumers are economically prepared to spend on a service or product and their actual spending.

Consumer Surplus

The divergence between the total consumers can and are willing to pay for a product or service and what they truly pay.

Binding Price Floor

A government-imposed minimum price set above the equilibrium price, resulting in a surplus by preventing the market price from falling to its natural level.