In the Lucas model, monetary policy is neutral even in the short run
A)since nominal wages are completely rigid
B)as long as monetary changes are fully anticipated
C)since people never make forecast errors
D)as long as real wages can adjust in proportion to money supply
E)since the short-run AS-curve is assumed to be vertical

Question

Quizplus · Accepted Answer

According to the Lucas model, monetary policy is neutral in the long run, but in the short run, it can have real effects if it is not fully anticipated. However, if monetary changes are fully anticipated, then they will have no real effects in the short run, making monetary policy neutral. Nominal wage rigidity, forecast errors, real wage adjustments or the shape of the AS curve do not explain the short-run neutrality of monetary policy in the Lucas model.

In the Lucas Model, Monetary Policy Is Neutral Even in the Short