According to the Lucas supply function, the amount of output produced is not related to the price level if
A) people's expectations of the price level are higher than the actual price level.
B) people's expectations of the price level are on target.
C) people's expectations of the price level are lower than the actual price level.
D) people's expectations of the price level are either higher or lower than the actual price level.

Question

Quizplus · Accepted Answer

According to the Lucas supply function, the amount of output produced is related to the expected price level, not the actual price level. If people's expectations of the price level are on target, then the supply function will work as expected and output will be produced in accordance with those expectations. If expectations are either too high or too low, then the supply function will be disrupted and output will not be produced in accordance with the actual price level. Therefore, the best choice is B, because if people's expectations of the price level are on target, then the supply function will work properly and output will be produced in accordance with the actual price level.

According to the Lucas Supply Function, the Amount of Output