Assume that many households and businesses reduce their spending only because they expect other households and consumers to reduce their spending.Also suppose that all households and consumers would be better off if they did not reduce their spending.This situation best describes the
A)real-business-cycle theory.
B)rational expectations theory.
C)concept of coordination failures.
D)adaptive expectations theory.

Question

Quizplus · Accepted Answer

This situation describes the concept of coordination failures, where individuals or groups fail to coordinate their actions, leading to suboptimal outcomes for everyone involved. In this case, if everyone expects others to reduce spending and acts accordingly, it results in reduced economic activity, even though all would be better off if they maintained their spending levels.

Assume That Many Households and Businesses Reduce Their Spending Only