The government of Montesia had announced that it would keep its money supply unchanged in 2010. However, in 2011, the money supply increased, thereby ruining public expectations. This led to _____
A) an implementation lag.
B) policy credibility.
C) a time-inconsistency problem.
D) the development of rational expectations.
E) a recognition lag.

Question

Quizplus · Accepted Answer

The situation described is an example of a time-inconsistency problem, in which policymakers deviate from their earlier announcements and create uncertainty and lack of trust among the public. This can lead to inflationary expectations and undermine the effectiveness of monetary policy. The other options do not apply to this scenario.

The Government of Montesia Had Announced That It Would Keep