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 address coordination failures by eliminating multiple equilibria. For example, if the government raises its level of spending, this can encourage firms to invest and hire workers, which increases output and employment. This can lead to a self-fulfilling prophecy if firms believe that the increased demand will be sustained in the future. By creating a single, stable equilibrium, fiscal policy can help stabilize output and promote economic growth.

Fiscal Policy Can Stabilize Output in the Coordination Failure Model