Which of the following is a characteristic of the 'Lucas Critique'?
A. Policy evaluation based on historical correlations remains valid under policy changes
B. Rational expectations are irrelevant for policy
C. Econometric models based on past data may fail when policy regimes change because agents alter their behaviour
D. Only adaptive expectations matter
Answer: Option C
Solution (By JKSSB Mock Tests)
The Lucas Critique argues that the parameters of traditional econometric models are not policy-invariant because economic agents change their behaviour when policy rules change.
Explanation:
Social preferences encompass motives such as altruism, inequity aversion, reciprocity and spite that make an individual’s utility depend on the payoffs or actions of other people.
Explanation:
National income is measured by product (value added), income and expenditure methods. Balance of payments is used for recording international transactions, not for measuring national income.
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