The fact that any model that utilizes adaptive expectations necessarily will be misspecified is called:
A) Okun's law.
B) time inconsistency.
C) the Lucas critique.
D) the Slutsky paradox.
E) monetarism.

Question

Quizplus · Accepted Answer

The fact that any model that utilizes adaptive expectations necessarily will be misspecified is called the Lucas critique. This is because adaptive expectations assume that agents base their expectations on past observations, but if the model changes policy, then agents' expectations will no longer be accurate based on past data, leading the model to be misspecified.

The Fact That Any Model That Utilizes Adaptive Expectations Necessarily