What does the time inconsistency of monetary policy mean?
A)It means that once people have formed expectations of low inflation based on a promise by the central bank, the central bank is tempted to raise inflation to lower unemployment.
B)It means that at some times central banks think it is more important to keep unemployment low; at other times, they think it is more important to keep inflation low.
C)It means that monetary policy is not consistent across time because it is influenced by politics.
D)It means that monetary policy cannot be consistent across time because the rate of inflation is fluctuating.

Question

Quizplus · Accepted Answer

The time inconsistency of monetary policy refers to the problem that arises when the central bank promises to pursue a policy of low inflation, but then finds it tempting to raise inflation temporarily to lower unemployment, which leads to a lack of credibility and trust in the central bank's policy. Therefore, option A is the best choice as it accurately defines the time inconsistency of monetary policy. Option B refers to the central bank having conflicting goals, and option C and D are not relevant to the concept of time inconsistency of monetary policy.

What Does the Time Inconsistency of Monetary Policy Mean