The Lucas supply function, in combination with the assumption that expectations are rational, implies that an announced monetary policy change will lead to
A) a positive price surprise.
B) no price surprise.
C) a negative price surprise.
D) a positive price surprise for expansionary monetary policy and a negative price surprise for contractionary monetary policy.

Question

Quizplus · Accepted Answer

According to the Lucas supply function, prices adjust immediately to changes in the money supply, so the announcement of a monetary policy change will not lead to any surprise in prices if expectations are rational. This is because prices will have already adjusted to the expected change in the money supply. Therefore, the correct answer is B, no price surprise.

The Lucas Supply Function, in Combination with the Assumption That