According to the Lucas supply function, the economy will produce more output when
A) prices are unexpectedly higher than when prices are at their expected level.
B) wages are below the expected level.
C) prices are unexpectedly lower than when prices are at their expected level.
D) prices are exactly equal to the expected level.

Question

Quizplus · Accepted Answer

The Lucas supply function states that firms base their production decisions on their expectations of prices. When prices are unexpectedly higher than expected, firms will increase output because they anticipate higher profits. Conversely, when prices are unexpectedly lower than expected, firms will decrease output because they anticipate lower profits. Therefore, option A is the correct answer.

According to the Lucas Supply Function, the Economy Will Produce