According to the Lucas' rational expectations approach,
A)people may not always forecast accurately, but they do not make systematic errors
B)anticipated changes in money supply have no real effect on output
C)unanticipated changes in money supply have only a short-lived effect on output and are soon reflected in a proportional price change
D)nominal wages are set on the basis of expected prices, and if expectations are wrong, output and employment will be affected
E)all of the above

Question

Quizplus · Accepted Answer

Lucas' rational expectations approach posits that individuals form expectations about the future based on all available information and therefore do not make systematic errors (A), that anticipated changes in money supply do not affect real output because individuals adjust their expectations accordingly (B), that unanticipated changes in money supply can temporarily affect output until prices adjust (C), and that nominal wages are indeed set based on expected prices, affecting output and employment if those expectations are incorrect (D). Thus, all of the statements (A, B, C, D) are consistent with Lucas' rational expectations approach, making E the correct answer.

According to the Lucas' Rational Expectations Approach