Lucas aggregate supply function

<p>The Lucas aggregate supply function or Lucas "surprise" supply function, based on the Lucas imperfect information model, is a representation of <a href="/facts/Aggregate_supply/5HIDYMHa">aggregate supply</a> based on the work of <a href="/facts/New_classical_macroeconomics/puHe0YKr">new classical</a> economist <a href="/facts/Robert_Lucas%2c_Jr./woSFuFCA">Robert Lucas</a>.  The model states that <a href="/facts/Economic_output/7joYTeNk">economic output</a> is a function of money or price "surprise".  The model accounts for the empirically based trade off between output and prices represented by the <a href="/facts/Phillips_curve/Q1bFQvdz">Phillips curve</a>, but the function breaks from the Phillips curve since only unanticipated price level changes lead to changes in output.  The model accounts for empirically observed short-run correlations between output and prices, but maintains the <a href="/facts/Neutrality_of_money/38azRJus">neutrality of money</a> (the absence of a price or money supply relationship with output and employment) in the long-run.  The <a href="/facts/Policy_Ineffectiveness_Proposition/rsqxQnHc">policy ineffectiveness proposition</a> extends the model by arguing that, since people with <a href="/facts/Rational_expectations/SSMQLugI">rational expectations</a> cannot be systematically surprised by <a href="/facts/Monetary_policy/LXehzvG0">monetary policy</a>, monetary policy cannot be used to systematically influence the economy.
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Lucas aggregate supply function open-in-new

Lucas aggregate supply function