The Lucas supply function, in combination with the assumption that expectations are rational, implies that an announced monetary policy change will
A) not change output.
B) decrease output, but never increase output.
C) either increase or decrease output, depending on the type of monetary policy change.
D) increase output, but never decrease output.

Question

Quizplus · Accepted Answer

The Lucas supply function, combined with rational expectations, suggests that if a monetary policy change is fully anticipated (announced and believed), it will not affect output because individuals will adjust their expectations and actions accordingly, neutralizing the policy's effect on real output.

The Lucas Supply Function, in Combination with the Assumption That