Policymakers may be better able to achieve their goals using a fixed policy rule rather than using discretion if they face the problem of:
A) short and predictable inside lags.
B) time-inconsistent policy.
C) short and predictable outside lags.
D) weak automatic stabilizers.

Question

Quizplus · Accepted Answer

If policymakers face time-inconsistent policy, they may be better off using a fixed policy rule rather than using discretion. Time inconsistency refers to a situation where a policymaker may have an incentive to deviate from an announced policy to pursue different objectives once the policy is implemented, which can lead to suboptimal outcomes. A fixed policy rule can provide a credible commitment to a specific course of action and reduce the temptation to deviate. The other options do not relate to the problem of time inconsistency.

Policymakers May Be Better Able to Achieve Their Goals Using