The Lucas supply function, in combination with the assumption that expectations are rational, implies that
A) anticipated policy changes have a significant effect on real output.
B) unanticipated policy changes have no effect on real output.
C) anticipated policy changes have no effect on real output.
D) the effect that policy changes have on real output is the same, regardless of whether those changes are anticipated or not.

Question

Quizplus · Accepted Answer

According to the Lucas supply function and rational expectations, agents adjust their behavior in response to anticipated policy changes, resulting in no effect on real output. Unanticipated policy changes, however, can still have an impact on real output as agents are unable to adjust their behavior before the change occurs. Therefore, only anticipated policy changes have no effect on real output.

The Lucas Supply Function, in Combination with the Assumption That