Lucas aggregate supply function: Difference between revisions

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== Background ==

New classical made its first attempt to model aggregate supply in Lucas and [[Leonard Rapping]] (1969).<ref>Snowdon and Vane (2005), 233.</ref> In this earlier model, supply (specifically labor supply) is a direct function of real wages: More work will be done when real wages are high and less when they are low. Under this model, unemployment is "voluntary."<ref>Snowdon and Vane (2005), 233.</ref> In 1972 Lucas made a second attempt at modelling aggregate demandsupply.<ref>Snowdon and Vane (2005), 233.</ref> This attempt drew from [[Milton Friedman]]'s [[natural rate hypothesis]] that challenged the Phillips curve.<ref>Snowdon and Vane (2003), 453.</ref> Lucas supported his original, theoretical paper that outlined the surprise based supply curve with an empirical paper that demonstrated that countries with a history of stable price levels exhibit larger effects in response to monetary policy than countries where prices have been volatile.<ref>Snowdon and Vane, 453.</ref>

Lucas's model dominated new classical economic business cycle theory until 1982 when [[real business cycle theory]] replaced Lucas's theory of a money driven business cycle with a strictly supply based model that used technology and other real shocks to explain fluctuations in output.<ref>Snowdon and Vane (2005), 295.</ref>