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 individuals expect the central bank to pursue monetary expansion in the future. Given this information, we know with certainty that:
A) the current interest rate effects are ambiguous.
B) current output will decrease.
C) the current output effects are ambiguous.
D) current output and the current interest rate will both increase.
E) the current interest rate will decrease.

Question

Quizplus · Accepted Answer

Monetary expansion in the future is expected to increase future output and lower future interest rates. Individuals, considering only the short-run effects, will expect current output to increase and the current interest rate to decrease.

Assume Individuals Consider Only the Short- Run Effects of Changes