One Potential Weakness of the Coordination Failure Model as an Explanation

question 22

Multiple Choice

One potential weakness of the coordination failure model as an explanation of business cycles is that

• A) evidence supporting intertemporal substitution as an important determinant of labour supply is weak.
• B) evidence supporting the existence of increasing returns at the aggregate level is weak.
• C) it fails to explain several of the key business cycle regularities.
• D) it requires that consumers not behave in a rational manner.
• E) the Bank of Canada does not use all available information.

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Definitions:

Supply

A relation between the price of a good and the quantity that producers are willing and able to sell per period, other things constant.

Demand

Refers to the quantity of a good or service that consumers are willing and able to purchase at various price levels over a given period of time.

Interest Rate

The percentage charged on borrowed money or paid on savings accounts, essentially the cost of borrowing money or the reward for saving.

Loanable Funds

The total amount of capital available in the financial markets for borrowing, influenced by savings and investments.