The time-inconsistency problem is likely to arise in Cadmia if _____.
A)attempts are made to coordinate monetary policy with fiscal policy
B)there is a lag between the announcement of a monetary policy and its implementation
C)policy makers initially aim to keep the price level stable but do not follow through as promised
D)policy makers do not allow enough time for a new policy to take effect
E)there is a deep conflict among monetary policy makers

Question

Quizplus · Accepted Answer

The time-inconsistency problem occurs when policy makers promise to pursue a particular policy in the future, but renege on that promise when the time comes. In this case, if policy makers initially promise to keep the price level stable but do not follow through as promised, it would create a credibility issue and lead to the time-inconsistency problem.

The Time-Inconsistency Problem Is Likely to Arise in Cadmia If