Question

Lucas and Sargent argue that the short-run trade-off between unemployment and inflation is caused by workers and firms using Fed policy to predict inflation. workers and firms using all the information available to predict inflation. workers and forms rapidly adjusting wages and prices in response to changes in expectations. workers and forms being fooled by unexpected changes in monetary policy.

Answer 1

Option D

Robert Lucas and Thomas Sargent argued that
there might not be a​ trade-off between unemployment and inflation in the short​ run, and the​ short-run Phillips curve would be vertical.If Lucas and Sargent were​ right,
an expansionary monetary policy would not work.

If workers and firms knew that an expansionary monetary policy will raise the inflation rate, they should use this information in their forecasts of inflation and if they do, an expansionary monetary policy will not cause the actual inflation rate to be greater than the expected inflation rate
Instead, the actual inflation rate will equal the expected inflation rate, the actual real wage will equal the expected real wage, and the unemployment rate will not fall below the natural rate. If people had rational​ expectations, since they will use all available information including knowledge of the effects of the​ Fed's monetary policy. If workers and firms have rational expectations, they will use all available information, including knowledge of the effects of the federal reserve policy.