Which of the following is a valid criticism of the rational expectations theory? (A) prices do not wait on events. (B) the assumption seems too strong. (C) people form the most accurate possible expectations. (D) adjustment of wages and prices might be quite rapid.

The correct answer is (B) the assumption seems too strong.

Explanation:

The theory of rational expectations is a hypothesis of economic science that states that the predictions about the future value of economically relevant variables made by the agents are not systematically wrong and that the errors are random (white noise). An alternative formulation is that rational expectations are "consistent expectations around a model," that is, in a model, agents assume that the predictions of the model are valid. The rational expectations hypothesis is used in many contemporary macroeconomic models, in game theory and in applications of rational choice theory.