The concept of dynamic inconsistency implies that a central bank
A)will always do the wrong thing if it is concerned with long-run outcomes rather than current disturbances
B)should never announce its intentions because doing so renders discretionary monetary policy useless
C)should resist making policy changes that may endanger its stated long-run goals even though these changes could successfully address a short-run problem
D)should always be inconsistent in its behavior so people will be less likely to profit from anticipating its policy actions
E)none of the above

Question

Quizplus · Accepted Answer

Dynamic inconsistency suggests that a central bank should resist making policy changes that may jeopardize its state long-term goals, even if such changes could potentially address a short-term problem. Therefore, option C is the best answer. The other options do not reflect the concept of dynamic inconsistency correctly.

The Concept of Dynamic Inconsistency Implies That a Central Bank