Which of the following would be a cause of time inconsistency of monetary policy?
A) The central bank has a legislated inflation target.
B) The central banker is conservative.
C) The central bank cares about unemployment as well as inflation.
D) The general public have adaptive expectations.
E) The general public have rational expectations.

Question

Quizplus · Accepted Answer

When a central bank cares about both inflation and unemployment, it may face a time inconsistency problem. This is because if the central bank is too aggressive in reducing inflation, it may cause a recession and increase unemployment in the short run. As a result, it may be tempting to deviate from the inflation target in the short run to stabilize the economy, even if this leads to higher inflation in the long run.

Which of the Following Would Be a Cause of Time