Write down one example to illustrate the Lucas Critique

The Lucas Critique is a macroeconomic concept that critics use of previously observed data to predict future expectations. Lucas Critique terms this as insignificant and inappropriate. It also critics the use of the consumption function in the Keynesian theory because it's invariant with government policy changes.

The best example of the Lucas Critique concept is that it underestimates or discourages using the relationship between inflation and employment. It is believed that an increase in inflation causes a rise in employment rates. However, the Lucas critique indicates that an increase in inflation can alter a firm's employment decision. This is because high inflation comes about with different changes and may sometimes increase or decrease in unemployment. It does not always rely on one factor and outcome.