Knowing enough about various algorithms to suggest different ones and their trade-offs in a brainstorming session when presented with a (vague) problem is something that actually happens in some jobs. That part is fine to simulate in an interview if it’s an important part of a particular job.

What most software engineering interviews should have but don’t are sections on fixing bugs and adding features in existing codebases. These are the bread and butter of a lot of jobs. But that doesn’t allow for interviewer dick waiving, so it’s pretty rare.