Assume Individuals Consider Only the Long Run Effects of Changes

question 32

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

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Definitions:

Interest Income

Income earned from deposit accounts or investments through the receipt of interest payments.

Fair Value

The estimated market value of an asset or liability, based on current conditions rather than historical cost.

Long-Term Investments

Investments in securities or other assets intended to be held for a period exceeding one year for capital growth or income generation.

Trading Investment

An investment in securities with the intention of selling them in the short term to profit from price changes.