According to the Lucas supply function,the amount of output produced is NOT related to the price level if
A)people's expectations of the price level are higher than the actual price level.
B)people's expectations of the price level are on target.
C)people's expectations of the price level are lower than the actual price level.
D)people's expectations of the price level are either higher or lower than the actual price level.

Question

Quizplus · Accepted Answer

The Lucas supply function is based on the premise that people form rational expectations about the future price level, and adjust their behavior accordingly. If people's expectations of the price level are on target, then the amount of output produced will be consistent with the economy's potential level of output, regardless of the actual price level. Therefore, the answer is B: people's expectations of the price level are on target.

According to the Lucas Supply Function,the Amount of Output Produced