According to the Lucas supply function, if the expected price level is smaller than the actual price level,
A) real output decreases.
B) real output increases.
C) real output must be at a maximum.
D) real output must be at a minimum.

Question

Quizplus · Accepted Answer

According to the Lucas supply function, if the expected price level is smaller than the actual price level, firms perceive the price of their product to have increased relative to the general price level. This incentivizes them to increase production, leading to an increase in real output.

According to the Lucas Supply Function, If the Expected Price