Monetary policy is considered time-inconsistent because
A)of the lag times associated with the implementation of monetary policy and its effect on the economy.
B)policymakers are tempted to pursue discretionary policy that is more contractionary in the short run.
C)policymakers are tempted to pursue discretionary policy that is more expansionary in the short run.
D)of the lag times associated with the recognition of a potential economic problem and the implementation of monetary policy.

Question

Quizplus · Accepted Answer

Monetary policy is considered time-inconsistent because policymakers may be tempted to pursue discretionary policy that is more expansionary in the short run, even though it may not be optimal in the long run. This is because such policies may be politically popular and might help policymakers attain their short-term objectives, such as promoting growth or reducing unemployment. However, in the long run, such policies may lead to higher inflation, lower economic growth, and other adverse outcomes, which policymakers may not have anticipated or fully recognized at the time of policymaking.

Monetary Policy Is Considered Time-Inconsistent Because