The Lucas supply function incorporates the idea that output depends on the difference between the actual price level and the expected price level.

Question

Quizplus · Accepted Answer

This is correct. The Lucas supply function includes the concept of "menu costs," which means that firms may be reluctant to immediately adjust prices in response to changes in the actual price level if they expect prices to move further in the same direction. Thus, output is influenced by the gap between actual and expected prices.

The Lucas Supply Function Incorporates the Idea That Output Depends