How does the Lucas critique relate to analysis using the simple Phillips curve? The Lucas critique:
A) supports analysis using the simple Phillips curve.
B) explains why the relationship depicted in the simple Phillips curve may not hold.
C) supports movement along a simple Phillips curve but only when policy changes cause the movement.
D) indicates that there are no conditions when the simple Phillips curve is accurate.

Question

Quizplus · Accepted Answer

The Lucas critique argues that economic policies based on historical data (like the simple Phillips curve relationship between inflation and unemployment) may not be reliable because people's behavior changes in response to policy changes. This means the relationship depicted in the simple Phillips curve may not hold under new policies, as expectations and behaviors adjust.

How Does the Lucas Critique Relate to Analysis Using the Simple