
Concept explainers
The things that Lucas critique states about the limitations of the current understanding of the way in which the economy works.

Explanation of Solution
The Lucas critique states those policymakers’ predictions for the effects of the given policy may generally be wrong as it is difficult for someone to accurately take in account the reaction of the people due to changes in the policy. This thing points out the limitation regarding the current understanding of the way in which economy works. It states that the reaction of people’s reaction and behavior cannot be predicted by the policymakers. Therefore, they have to rely on various models to predict or estimate the effects of change in the policy in an economy.
Thus, Lucas critique states about the limitations of the current understanding of the way in which the economy works.
Introduction: Lucas critique refers to a critique that argues that it is not good to try to predict the changes in the economic policy on the basis of the past data available. It criticizes the Keynesian models and argues that it cannot be considered structured as it is invariant in response to changes in the policy variables of the government.
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Chapter 24 Solutions
The Economics of Money, Banking and Financial Markets (11th Edition) (The Pearson Series in Economics)
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