When answering this question, assume individuals consider only the short-run effects of changes in future variables when forming expectations of future output and future interest rates. Suppose policy makers announce a reduction in future government spending. Which of the following will occur as a result of this expected reduction in government spending?
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 an ambiguous effect on expected future output
D) none of the above
Question 2
American Recovery and Reinvestment Act 2009 calls for
A) both tax reductions and government spending reductions.
B) both tax reductions and government spending increases.
C) both tax increases and government spending increases.
D) both tax increases and government spending reductions.
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