The Lucas supply function, in combination with the assumption that expectations are rational, implies that if a monetary policy change is announced to the public,
A) the change in real output will be positive.
B) the change in real output will be negative.
C) there will be no change in real output.
D) Both A and B are possible, depending on they type of monetary policy change that has been announced.

Question

Quizplus · Accepted Answer

According to the Lucas supply function and rational expectations, changes in nominal variables (such as money supply) do not have a long-term impact on real variables (such as output). In the short run, there may be some adjustment, but over time expectations adjust and the economy returns to the natural rate of output. Therefore, there will be no significant change in real output in response to a monetary policy change.

The Lucas Supply Function, in Combination with the Assumption That