If,in the coordination failure model,the nominal money supply acts as a sunspot variable,then it is likely that the nominal money supply would
A) be procyclical.
B) be acyclical.
C) be countercyclical.
D) alternatively appear to be procyclical and countercyclical.
E) be a leading indicator.

Question

Quizplus · Accepted Answer

If the nominal money supply acts as a sunspot variable, it is likely to be procyclical. This is because sunspots are random and not related to economic fundamentals, and therefore their impact on the economy is unpredictable. As a result, changes in the nominal money supply that are driven by sunspots are likely to be correlated with changes in output and prices, leading to a procyclical relationship.

If,in the Coordination Failure Model,the Nominal Money Supply Acts as a Sunspot