Author Question: Explain how a change in expected future output could affect current output. What will be an ideal ... (Read 111 times)

K@ · **on:** Jun 30, 2018

Explain how a change in expected future output could affect current output.

What will be an ideal response?

Question 2

If the nominal interest rate is less than the real interest rate, we know that

A) both the nominal or real interest rate must be negative.
B) the nominal interest rate must be equal to expected inflation.
C) expected deflation must be occurring.
D) expected inflation must be positive.
E) expected inflation must be zero.

abro1885 · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

There are two channels here. An increase in future expected output will increase future expected profits. When future expected profits rise, the discounted present value of profits will be higher. More projects will now occur. As investment today rises, demand rises, and, therefore, current output will rise. An increase in future expected output will also increase human wealth and, therefore, cause consumption to increase. The rise in consumption will increase demand and current output.

Answer to Question 2

C