Author Question: Explain whether a fiscal policy that causes an increase in current and future government spending ... (Read 57 times)

MGLQZ · **on:** Jun 30, 2018

Explain whether a fiscal policy that causes an increase in current and future government spending can cause a reduction in current output.

What will be an ideal response?

Question 2

A reduction in the unemployment rate will tend to cause which of the following?

A) an increase in the separation rate
B) a reduction in the nominal wage
C) a reduction in the duration that one is unemployed
D) none of the above

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

Answer to Question 1

Current output could fall. The increase in G will cause the IS curve to shift to the right. The increase in future G will cause an increase in future output which will also shift the IS curve to the right. The increase in future rates, however, will cause current demand to fall and shift the current IS curve to the left. If these effects dominate (or if the Fed is expected to contract in the future), Y could fall in the current period.

Answer to Question 2

C