When the central bank pursues expansionary monetary policy and all other economic agents build this into their decision making, ________ with no economic benefit; this is called the ________ problem.
A) output rises; policy lag
B) unemployment rises; time inconsistency
C) expectations rise; adaptive expectations
D) inflation rises; time inconsistency
E) inflation rises; discretionary

Question

Quizplus · Accepted Answer

When the central bank pursues expansionary monetary policy and all other economic agents build this into their decision making, inflation tends to rise. This is because of the time inconsistency problem, where the short-term benefits of expansionary policy lead to inflationary pressures in the long-term.

When the Central Bank Pursues Expansionary Monetary Policy and All