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.

Question

Quizplus · Accepted Answer

The coordination failure model relies on the existence of increasing returns to scale at the aggregate level, and if evidence supporting this is weak, it undermines the model's validity as an explanation for business cycles.

One Potential Weakness of the Coordination Failure Model as an Explanation