When most consumers and ﬁrms reduce spending only because they expect other consumers and ﬁrms to reduce spending, and a recession results,
A) a self-correction has occurred.
B) an adverse aggregate supply shock has occurred.
C) a coordination failure has occurred.
D) a real-business downturn has occurred.

Question

Quizplus · Accepted Answer

When consumers and firms reduce spending only because they expect others to reduce spending, it leads to a coordination failure. This can result in a recession as overall spending decreases, which in turn leads to a decrease in output and employment. This is not a self-correction, as the situation does not correct itself without intervention. It is also not an adverse aggregate supply shock, which refers to a sudden negative shock to productive capacity. Finally, while it is a real-business downturn, this term is not as specific as coordination failure in describing the cause of the recession.

When Most Consumers and ﬁRms Reduce Spending Only Because They