The Lucas supply function, in combination with the assumption that expectations are rational, implies that if a monetary policy change is announced to the public, the actual price level
A) will be impacted more than the expected price level.
B) will be impacted less than the expected price level.
C) and the expected price level will be impacted in the same way.
D) will be impacted but the expected price level will not.

Question

Quizplus · Accepted Answer

When expectations are rational, individuals use all available information, including announced policy changes, to form their expectations. Therefore, both the actual and expected price levels adjust in the same way to the announcement.

The Lucas Supply Function, in Combination with the Assumption That