The theory that monetary policy conducted on a discretionary,day-by-day basis leads to poor long-run outcomes is referred to as the
A)adverse selection problem.
B)moral hazard problem.
C)time-inconsistency problem.
D)nominal-anchor problem.

Question

Quizplus · Accepted Answer

The theory that monetary policy conducted on a discretionary, day-by-day basis leads to poor long-run outcomes is referred to as the time-inconsistency problem. This is because policymakers may be inclined to pursue expansionary policies in the short run to boost employment and output, but in the long run, this can lead to high inflation and other macroeconomic problems. A more rules-based approach to monetary policy may help overcome this time-inconsistency problem and produce better long-term outcomes. The other options (adverse selection problem, moral hazard problem, nominal-anchor problem) are not relevant to this concept.

The Theory That Monetary Policy Conducted on a Discretionary,day-By-Day Basis