Figure 17-3
-In the figure above, suppose we are working under the assumption of the Lucas model. The Fed has been following an announced policy of "zero money growth for an indefinite period." Suddenly and without warning it produces positive money growth and a "money surprise." This would result in a movement between points
A) A and C.
B) A and B.
C) D and B.
D) D and A.
E) A and D.

Question

Figure 17-3 
-In the figure above, suppose we are working under the assumption of the Lucas model. The Fed has been following an announced policy of "zero money growth for an indefinite period." Suddenly and without warning it produces positive money growth and a "money surprise." This would result in a movement between points
A) A and C. 
B) A and B. 
C) D and B. 
D) D and A. 
E) A and D.

Quizplus · Accepted Answer

The Lucas model assumes that agents are forward-looking and rational. Therefore, they will anticipate the Fed's policy change and adjust their expectations accordingly. This will lead to a movement along the aggregate supply curve from point A to point C.

Figure 17-3 -In the Figure Above, Suppose We Are Working Under the Working