Let the usual price expectations relationship hold so that it can be^represented^{mathematically}^by^P^e⁼^P^{^}⁺^b^Pi ^-^P^{^}⁾^.^As^the^coefficient^b^gets Larger, the Lucas supply curve A) must get steeper. B) must get flatter. C) may get steeper or flatter depending on price variability. D) must shift out from the vertical axis. E) must shift in toward the vertical axis.

Question

Quizplus · Accepted Answer

As the coefficient $b$ in the price expectations relationship gets larger, it implies that suppliers' responsiveness to the difference between actual and expected prices increases. This makes the Lucas supply curve steeper because suppliers are more sensitive to price differences, adjusting their supply more aggressively in response to changes in actual versus expected prices.

Let the Usual Price Expectations Relationship Hold So That It