Assume Individuals Consider Only the Short Run Effects of Changes

question 49

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 current taxes are cut AND that individuals expect future taxes to decrease.Given this information,we know with certainty that

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

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Definitions:

Cash Balances

Cash balances refer to the amount of currency, coins, and balances in checking and savings accounts that a company holds at any given time.

Pledging Agreement

A contract in which a borrower pledges an asset as collateral for a loan, ensuring the lender can seize the asset if the loan is not repaid.

Account Receivable

Money owed to a business by its clients or customers for goods or services delivered or used but not yet paid for.

Excess Cash

The amount of cash holdings that exceeds what a company requires for its immediate operational needs, often considered for investment or distribution.