Fiscal policy can stabilize output in the coordination failure model by
A) dampening the fluctuations in the business cycle.
B) controlling government spending.
C) lowering the real interest rate.
D) eliminating multiple equilibriums.
E) eliminating sunspots.

Question

Quizplus · Accepted Answer

Fiscal policy can eliminate multiple equilibriums by providing signals to firms and households about the government's expectations of future economic activity. By increasing government spending, fiscal policy can encourage firms to invest and households to consume, thereby increasing aggregate demand and stabilizing output. This can help to avoid coordination failures in which firms and households are uncertain about each other's actions, leading to inefficient outcomes.

Fiscal Policy Can Stabilize Output in the Coordination Failure Model