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

The concept of coordination failures describes the situation where multiple agents would be better off if they coordinated their actions, but due to expectations of others' actions, they end up reducing spending (or taking other actions) even though this hurts everyone. This is consistent with the scenario outlined in the question.

Assume That Many Households and Businesses Reduce Their Spending Only