Exchange-rate targeting allows a central bank to ________,thus this will ________ the probability of policy developing a time-inconsistency problem.

Question

Quizplus · Accepted Answer

Exchange-rate targeting involves a central bank following a policy rule that sets a specific exchange rate target. This helps to decrease the probability of the policy developing a time-inconsistency problem, where the central bank deviates from its stated policy due to short-term pressures or political considerations. On the other hand, following a discretionary policy where the central bank makes ad-hoc decisions based on current economic conditions increases the likelihood of time-inconsistency problems. Therefore, choice A is the best answer.

Exchange-Rate Targeting Allows a Central Bank to ________,Thus This Will