In the coordination failure model, the 'bad' equilibrium is characterized by a
A) higher real interest rate and a higher price level than the 'good' equilibrium.
B) higher real interest rate and a lower price level than the 'good' equilibrium.
C) lower real interest rate and a higher price level than the 'good' equilibrium.
D) lower real interest rate and a lower price level than the 'good' equilibrium.
E) lower real interest rate and a lower aggregate output than the "good" equilibrium.

Question

Quizplus · Accepted Answer

In the coordination failure model, the 'bad' equilibrium is characterized by a higher real interest rate and a higher price level than the 'good' equilibrium. This is because in the 'bad' equilibrium, there is a lack of coordination between firms and households, which leads to a higher demand for goods and services and a higher price level. The higher price level then leads to a higher real interest rate, as firms are willing to pay more to borrow money to invest in new projects.

In the Coordination Failure Model, the 'Bad' Equilibrium Is Characterized