Signal extraction problem :

Firms had to determine what portion of price changes in their respective industries reflected a general change in nominal prices ( inflation ) and what portion reflected a change in real prices for inputs and outputs. This concept has been claimed by Lucas that supplier's had to respond to a " signat extraction problem" when making decisions based on prices.

Unanticipated inflation always redistributes wealth from people who have contracted to recieve fixed nominal amounts in the future to the people who have contracted to pay those fixed nominal accounts.

Wealth is distributed from debtors to creditors. In the same way producers take advantage of the price rise and they produce more to maximize the profit. But what happens is that demand get reduces. For producer cost of production increases.

The factors that effect the magnitude of this response are as follows :

1.Eroding purchasing power

2.Encourages spending, Investing

3. Cause more inflation

4.Raises the cost of borrowing

5.Reduces unemployment

They key empirical implication of misperception model implies that the slope of tge Lucas curve depends on the variability of nominal distubances.

Anticipated monetary policy largely effects the real estate market.

This will help in controlling inflation. The producers get the advantage anf they start producing more with low cost. Export and imports are also effected.

Monetary policy is a set of actions through which the monetary authority determines the conditions under which it supplies the money that circulates in the economy.

Effects of monetary policy are as follows:

1.This largely effct on interest rates.

2.When tge interest rates increases credit available for investment and consumption decreases

3.Increase in interest can make domestic financial assets more attractive to investors

4.Reduces demand for equity

5.Effects expectations of future performance of economy, in particular prices.