Which of the following will time inconsistency cause?
A)It will cause the short-run Phillips curve to be higher than it otherwise would.
B)It will cause the short-run Phillips curve to be lower than it otherwise would.
C)It will cause the long-run Phillips curve to be farther to the right than it otherwise would.
D)It will cause the long-run Phillips curve to be farther to the left than it otherwise would.

Question

Quizplus · Accepted Answer

Time inconsistency refers to the situation when a policymaker's preferences change over time. When this happens, the policymaker may be willing to accept a higher level of inflation in the short run to achieve lower unemployment. As a result, the short-run Phillips curve shifts upward, showing a higher level of inflation for any given level of unemployment. This is because people come to expect higher inflation as policymakers prioritize employment over controlling inflation in the short run.

Which of the Following Will Time Inconsistency Cause