Assume Individuals Consider Only the Long Run Effects of Changes

question 35

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 current government spending increases and that individuals expect future government spending to increase.Given this information,we know with certainty that

• A)current output and the current interest rate will both increase.
• B)current output will not change.
• C)future expected output will decrease.
• D)future expected output will not change.

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Definitions:

Conversion Ratio

A specific number of shares a bondholder can receive for each bond if they choose to convert it into stock.

Market Value

The present cost at which a service or asset is available for purchase or sale in the market.

Bond Exchange

The process of trading bonds in the financial markets or swapping one bond for another to achieve better investment goals.

Carrying Cost

The total cost associated with holding inventory, including storage, insurance, taxes, depreciation, and opportunity costs, among others.