The existence of the time inconsistency problem in macro policy suggests which of the following?
A) Use fiscal and monetary policy to fine tune the economy.
B) Appoint someone who is more conservative than the rest of the government to head the central bank.
C) Intervene frequently in the foreign exchange market.
D) Reduce the independence of the central bank.
E) Eliminate rational expectations from econometric models used for forecasting.

Question

Quizplus · Accepted Answer

The time inconsistency problem in macro policy suggests that policymakers might have an incentive to deviate from previously announced policies if they believe such a deviation could bring about more favorable short-term outcomes, even if it might lead to less favorable long-term outcomes. Appointing someone more conservative than the rest of the government to head the central bank can help mitigate this problem by ensuring that the central bank prioritizes long-term economic stability over short-term gains, thus reducing the likelihood of time-inconsistent policy actions.

The Existence of the Time Inconsistency Problem in Macro Policy