Question

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 occured b. An adverse aggregate supply shock has occired c. A coordination failure has occured d. A real-bussiness-downturn has occured

Answer 1

Answer: Option (C) is correct.

Explanation:

Correct option: A coordination failure has occured.

When it was observed that most of the consumers and firms decreases their spending because they expect that some other consumers and firms decreases their consumption or spending and this will lead to a recession in an economy. So there is a coordination failure has occured.

Coordination failure is generally occurs when some of the firms can achieve a desirable equilibrium but unable to achieve it because they are not be able to coordinate with their decision making.