The Lucas supply function, in combination with the assumption that expectations are rational, implies that an announced change in monetary policy affects
A) the actual price level, but not the expected price level.
B) neither the actual price level nor the expected price level.
C) the expected price level, but not the actual price level.
D) both the actual price level and the expected price level.

Question

Quizplus · Accepted Answer

The Lucas supply function, combined with rational expectations, suggests that an announced change in monetary policy will affect both the actual and expected price levels. This is because rational agents will adjust their expectations based on the announcement, which in turn affects actual prices through their economic decisions.

The Lucas Supply Function, in Combination with the Assumption That