When does the time inconsistency problem arise?
A) when attempts are made to coordinate monetary policy throughout different time zones
B) when there is a lag between the announcement of a monetary policy and the implementation of it
C) when policymakers have an incentive to mislead people about their monetary policy intentions
D) when policymakers do NOT allow enough time for a new policy to take effect

Question

When does the time inconsistency problem arise?  
A) when attempts are made to coordinate monetary policy throughout different time zones 
B) when there is a lag between the announcement of a monetary policy and the implementation of it 
C) when policymakers have an incentive to mislead people about their monetary policy intentions 
D) when policymakers do NOT allow enough time for a new policy to take effect

Quizplus · Accepted Answer

The time inconsistency problem arises when policymakers have an incentive to mislead people about their monetary policy intentions. This occurs when policymakers may make promises regarding future monetary policy that they may not be able to keep due to changing economic conditions or political pressures. As a result, people may not trust policymakers and may not respond to their announcements and policies in the expected way, which can create economic instability.

When Does the Time Inconsistency Problem Arise