If households and ﬁrms cut back on spending because they expect other households and ﬁrms to do so, and this self-fulﬁlling prophecy causes a recession, then this would be an example of
A) insider-outsider relationships.
B) eﬃciency wage theory.
C) a coordination failure.
D) a price-level surprise.

Question

Quizplus · Accepted Answer

This scenario describes a coordination failure, where the actions of individuals and firms are not coordinated, leading to an overall reduction in spending and a recession. This is a classic example of a self-fulfilling prophecy, where expectations of a downturn lead to actions that cause the predicted downturn to occur.

If Households and ﬁRms Cut Back on Spending Because They