The Lucas supply function states that real output can change from its fixed level
A) only if there is a positive price surprise.
B) only if there is a negative price surprise.
C) only if there is no price surprise.
D) Both A and B are possible.

Question

Quizplus · Accepted Answer

The Lucas supply function posits that real output deviates from its natural level only if there are unexpected changes in the price level, meaning both positive and negative price surprises can cause changes in output. This reflects the idea that firms adjust their production based on unexpected changes in prices, not on the direction of the change.

The Lucas Supply Function States That Real Output Can Change