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.
I believe my answer is B
Give the answer B, and it will be marked wrong. What is a coordination failure?
A situation in which do not reach a mutually beneficial outcome because they lack some way to jointly coordinate their actions; a possible cause of macroeconomics instability.
To determine the correct answer, let's analyze the given scenario:
"When most consumers and firms reduce spending only because they expect other consumers and firms to reduce spending, and a recession results."
This situation describes a feedback loop in which consumers and firms reduce their spending due to the expectation that others will do the same. As a result, overall spending decreases, leading to a recession.
Now, let's evaluate the answer choices:
A. A self-correction has occurred: This option implies that the economy has automatically adjusted itself to restore equilibrium. However, there is no mention of any natural corrective mechanism in the scenario, so we can eliminate this option.
B. An adverse aggregate supply shock has occurred: This option refers to sudden negative events that affect the overall supply side of the economy. While reduced spending can have implications on the supply side in the long run, it is not the primary cause in the given scenario. Therefore, this option is not the most accurate choice.
C. A coordination failure has occurred: This option suggests that the recession occurred due to a lack of coordination between consumers and firms. In this case, when individuals make decisions based on their expectations of others' behavior, the lack of coordination in adjusting spending patterns can lead to a recession. This accurately represents the situation described, so this is a possible answer.
D. A real-business downturn has occurred: This option refers to a decline in economic activity as a result of regular business cycles. While the scenario involves reduced spending and a recession, the primary cause is not related to the usual fluctuations within the business cycle. Therefore, this option is not the most appropriate.
Based on the analysis, the most suitable answer is C. A coordination failure has occurred.