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→Citations: see also Lucas-Islands model |
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The simple version models aggregate output as a function of the price surprise. A more complicated expression of the Lucas supply curve adds expectations to the model. Aggregate supply is a function of the natural rate of output(<math>Y_{N_t}</math>) and the difference between actual prices (<math>P_t</math>) and the expected price level given past information <math>\Omega_{t-1}</math> times a coefficient based on an economy's sensitivity to price surprises (<math>\alpha</math>):<ref>Snowdon and Vane (2005), 234.</ref>
:<math>Y_s = Y_{N_t} + \alpha [ P_t - E\left(P_t | \Omega_{t-1} \right) ] </math>
== See also ==
* [[Lucas-Islands model]]
==Citations==
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