A situation where policymakers have the incentive to deviate from their initial course of action once other agents in the economy have acted is called a(n):
A) rational expectation.
B) outside lag.
C) time-inconsistent policy.
D) active policy rule.

Question

Quizplus · Accepted Answer

A time-inconsistent policy occurs when policymakers have an incentive to deviate from their initial course of action once other agents in the economy have acted, even though the initial course of action was considered optimal at the time it was made. This is often the case when policymakers use monetary or fiscal policies to influence the economy, as their actions affect individuals and businesses who in turn may change their behavior in response. As a result, policymakers may be tempted to deviate from their initial policy in the hopes of achieving a better outcome.

A Situation Where Policymakers Have the Incentive to Deviate from Their