Question

Craig and Kris were walking directly toward each other in a congested store aisle. Craig moved to his left to avoid Kris, and at the same time, Kris moved to his right to avoid Craig. They bumped into each other. What concept does this example illustrate? How does this idea relate to macroeconomic instability?

Short answer

The given example illustrates the concept of coordination failure. The coordination failure leads to macroeconomic instability because of differences in the expectations in the wrong direction.

Step-by-step solution

Explanation of the example

Coordination failures occur when people fail to reach a mutually beneficial equilibrium because they lack a way to coordinate their actions. In the above example, Craig and Kris expect that the other one will move in the other direction and not the same and keep walking. But the expectations are entirely based on individual rather than coordination. So, they bump into each other.

In relation to macroeconomic instability

Suppose that individual firms and households expect other firms and consumers to cut back on investment and consumption. As a result, each firm and household will anticipate a reduction of aggregate demand, and the firms will reduce the aggregate. Consequently, there is instability in the form of unemployment and inflation. If there had been coordination among firms and households, instability could have been avoided.