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,
A) the price surprise will be positive.
B) the price surprise will be negative.
C) there will be no price surprise.
D) Both A and B are possible, depending on they type of monetary policy change that has been announced.

Question

Quizplus · Accepted Answer

The Lucas supply function, combined with rational expectations, implies that if a monetary policy change is fully anticipated (announced to the public), there will be no price surprise, as agents adjust their expectations accordingly.

The Lucas Supply Function, in Combination with the Assumption That