One potential weakness of the coordination failure model as an explanation of business cycles is that
A) government policy is unpredictable.
B) consumer behaviour is rational and predictable.
C) that underlying shocks that cause business cycles are expectations which are essentially unobservable.
D) money supply shocks are predictable.
E) there are fluctuations between "good" and "bad" equilibria.

Question

Quizplus · Accepted Answer

The coordination failure model suggests that business cycles are caused by expectations which are essentially unobservable. This implies a weakness or limitation in the model, as it is difficult to observe and measure the underlying shocks that cause business cycles. Government policy, consumer behavior, and money supply shocks are not directly related to this weakness of the coordination failure model. The existence of fluctuations between "good" and "bad" equilibria may be seen as a strength of the model.

One Potential Weakness of the Coordination Failure Model as an Explanation