Critics of the so-called DSGE models point out that these models
A)do not incorporate rational expectations
B)assume that wages and prices adjust slowly so markets take a long time to clear
C)ignore the fact that the economy can be hit by random shocks
D)make the unrealistic assumption that people have a well-designed, long?term plan and can therefore adapt to unexpected shocks in a rational, consistent way
E)all of the above

Question

Quizplus · Accepted Answer

DSGE models, or Dynamic Stochastic General Equilibrium models, indeed make the assumption that individuals have rational expectations and can adapt to unexpected shocks in a rational, consistent manner. This is a point of criticism because it assumes a level of foresight and rationality in decision-making that many believe is not reflective of real human behavior. Critics argue this makes the models overly optimistic about individuals' ability to adjust to economic changes.

Critics of the So-Called DSGE Models Point Out That These