The Lucas supply function states that real output will not 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 is based on the concept of rational expectations, which means that economic agents have accurate information about the future and adjust their behavior accordingly. Therefore, if there is no price surprise, the agents will not change their behavior and real output will stay at its fixed level. Positive or negative price surprises, on the other hand, can lead to changes in behavior and therefore affect real output.

The Lucas Supply Function States That Real Output Will Not