Homework Answers
Lucas critique states that we should predict the effects of any policy basing on the past historical data. Lucas only points that what if the prediction went wrong.
From the past experiences economist always state that fall in interest rates and increase money supply in the market will increase the consumer to spend more and industries to borrow more money and inevst in new projects
Lucas critique state that what if the prediction is wrong what if people are not spending more as they see that price level in the market is high and what if industries are not borrowing money as they see that this is not the good time to invest in business.
So Lucas critique is always telling not predict any policy behaviour based on past experience as there are some changes in economic variables.
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