The Lucas supply function, in combination with the assumption that expectations are rational, implies that announced policy changes
A) will have no effect on the actual price level.
B) will have no effect on real output.
C) will have no effect on the expected price level.
D) will have no effect on nominal output.

Question

Quizplus · Accepted Answer

The Lucas supply function, combined with rational expectations, suggests that if policy changes are anticipated (or announced), they will not affect real output because economic agents will adjust their expectations accordingly, neutralizing the impact on real variables.

The Lucas Supply Function, in Combination with the Assumption That