A mainstream criticism of rational expectations theory is that
A) the theorists confuse correlation with causation in interpreting the empirical evidence.
B) people do not make consistent forecasting errors that can be exploited by policymakers.
C) many markets are not purely competitive and do not adjust rapidly to changing market conditions.
D) the data indicate that economic policy does not affect real GDP and employment.

Question

Quizplus · Accepted Answer

The criticism that "many markets are not purely competitive and do not adjust rapidly to changing market conditions" highlights a flaw in the assumption of rational expectations theory that markets are efficient and always adjust quickly to new information. This suggests that the theory may not accurately reflect real-world economic behavior. The other choices are not consistent with mainstream criticisms of rational expectations theory.

A Mainstream Criticism of Rational Expectations Theory Is That