When policy makers have an incentive to announce one policy to shape expectations but then pursue a different policy once those expectations have been formed and acted on,there is
A)no problem; this is normal behavior
B)policy credibility
C)a time-inconsistency problem
D)rational expectation
E)None of the answers is correct

Question

Quizplus · Accepted Answer

The situation described is a time-inconsistency problem. This occurs when a policy maker has an incentive to promise a certain policy to influence expectations and behavior, but then finds it optimal to pursue a different policy once those expectations have been formed and acted upon. This inconsistency undermines the credibility of the policy maker and can lead to market instability and inefficiency.

When Policy Makers Have an Incentive to Announce One Policy