The Lucas critique is an objection to the assumption that
A)inflation is always and everywhere a monetary phenomenon.
B)there is a negative relationship between inflation and unemployment.
C)historical relationships between macroeconomic variables will continue to hold after new policies are in place.
D)people form expectations rationally.

Question

Quizplus · Accepted Answer

The Lucas critique challenges the notion that historical relationships between macroeconomic variables will continue to hold after new policies are put in place. It argues that people may change their behavior in response to new policy, rendering previously observed relationships and correlations invalid.

Therefore, options A, B, and D are incorrect as they do not relate to the Lucas critique.

The Lucas Critique Is an Objection to the Assumption That