The time-inconsistency problem in monetary policy can occur when the central bank conducts policy
A)using a nominal anchor.
B)using a strict and inflexible rule.
C)on a discretionary,day-by-day basis.
D)using a flexible,discretionary rule.

Question

Quizplus · Accepted Answer

The time-inconsistency problem in monetary policy arises when the central bank conducts policy on a discretionary, day-by-day basis. This is because the central bank may be tempted to deviate from its stated policy in order to achieve short-run objectives, which can undermine its credibility and the effectiveness of its policies in the long run. Using a nominal anchor or a strict and inflexible rule can help to avoid this problem as they provide a clear framework for policy decisions. A flexible, discretionary rule can also lead to time-inconsistency problems.

The Time-Inconsistency Problem in Monetary Policy Can Occur When the Central