Answer to Question #109303 in Macroeconomics for Esmat Asem

Question

With the help of Lucas' model, show how supply and demand shocks are mitigated in the presence of rational expectations and Lucas' supply curve.

Answer 1

The cornerstone of Lucas new classical theory is the concept of rational expectations. By ratio­nal expectations Lucas means that people use all available relevant information to make economic forecasts about price level. This information includes not only explicit changes in money supply, Government’s fiscal policy, international developments (which determine exports and prices of fuel, raw materials, and other commodities) but also economic theory about how the economy works.

Robert Lucas is of the view that it is only unanticipated changes in aggre­gate demand that are the cause of cyclical fluctuations in the economy.

https://www.google.com/amp/s/slideplayer.com/amp/10819812/

http://www.yourarticlelibrary.com/macro-economics/theories-macro-economics/the-lucas-new-classical-theory-of-business-cycles-explained-with-diagram/38075