One Potential Weakness of the Coordination Failure Model as an Explanation

question 25

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:

Competitive Firm

A company that operates in a market where there are many buyers and sellers, and it has little control over the market price.

MC Curve

The graphical representation of how the cost to produce an additional unit of a good changes with the production volume.

Short-Run Supply Curve

A graphical representation showing the quantity of goods a firm is willing and able to supply at different prices over a short period, where at least one input is fixed.

Fixed Costs

Expenses that do not change with the volume of production or sales, such as rent, salaries, and insurance premiums.