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.

Question

Quizplus · Accepted Answer

In the coordination failure model, the nominal money supply acts as a sunspot variable, which means it does not have any fundamental economic rationale but simply serves as a signal or coordination device for agents to coordinate their actions. If the nominal money supply is perceived as a signal of future economic conditions, such as inflation or output growth, agents may adjust their behavior accordingly. Therefore, if the nominal money supply is increasing, agents may expect higher future inflation or output growth and adjust their consumption, investment, and pricing decisions accordingly, leading to a more expansionary economic environment. Conversely, if the nominal money supply is decreasing, agents may expect lower future inflation or output growth and adjust their behavior accordingly, leading to a more contractionary economic environment. As a result, the nominal money supply can be procyclical, that is, positively correlated with economic activity, in this model.

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