Even if people have rational expectations,
A)unannounced changes in monetary policy can never affect output
B)unemployment can never go below its natural rate
C)income tax cuts will have a permanent effect on output
D)supply shocks will not affect output or pries as long as the central bank accommodates them
E)money supply changes can affect real output if individuals mistake movements in absolute prices for relative price changes

Question

Quizplus · Accepted Answer

Even with rational expectations, changes in the money supply can still affect real output if individuals make mistakes in interpreting price changes. This is known as the "Lucas Critique." Choices A, B, C, and D are all incorrect statements.

Even If People Have Rational Expectations