The ________ problem of discretionary policy arises because economic behavior is influenced by what firms and people expect the monetary authorities to do in the future.
A)moral hazard
B)time-inconsistency
C)nominal-anchor
D)rational-expectation

Question

Quizplus · Accepted Answer

The time-inconsistency problem arises because although the monetary authorities may announce their intentions to pursue a certain policy, they may change their minds in the future if circumstances change. As a result, firms and people may not trust the announcements of the monetary authorities, leading to less effective policy outcomes. Moral hazard refers to the tendency of agents to take on more risk when they are insured against losses. A nominal anchor is a reference point or target for the central bank to guide expectations for inflation. Rational expectations theory assumes that agents use all available information to form their expectations about the future. None of these concepts directly relate to the time-inconsistency problem of discretionary policy.

The ________ Problem of Discretionary Policy Arises Because Economic Behavior