A Mainstream Criticism of Rational Expectations Theory Is That

question 42

Multiple Choice

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.

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Definitions:

Money Income

The total income a person or entity receives in monetary form, including wages, salaries, benefits, and income from investments.

Marginal Rate

A term used to describe the rate at which one variable changes as another variable changes by a single unit, often applied in economic analysis like the marginal tax rate or marginal rate of substitution.

Substitution

The act of replacing one good or service with another due to changes in price or preference.

Price Ratio

The relative price of one good or service in comparison to another, often used in economic analysis and decision-making.