In the Smets-Wouters DSGE model, ________ when there is an increase in government spending because ________.
A) consumption falls; more government spending today means higher taxes later
B) consumption rises; more workers are attracted to higher nominal wages
C) inflation falls; prices are sticky
D) consumption falls; the natural rate of unemployment falls
E) None of these answers are correct.

Question

Quizplus · Accepted Answer

According to the Smets-Wouters DSGE model, consumption falls when there is an increase in government spending because individuals expect higher taxes in the future to pay for the increased spending. This reduces their disposable income and lowers consumption.

In the Smets-Wouters DSGE Model, ________ When There Is an Increase