A law that requires the money supply to grow by a fixed percentage each year would eliminate which of the following?
A)the time inconsistency problem, but not political business cycles
B)the political business cycle, but not the time inconsistency problem
C)both the time inconsistency problem and political business cycles
D)neither the time inconsistency problem nor political business cycles

Question

Quizplus · Accepted Answer

A law that requires the money supply to grow by a fixed percentage each year would eliminate both the time inconsistency problem and political business cycles. The time inconsistency problem arises when a central bank makes a commitment to a future policy that it knows it will not be able to keep. Political business cycles arise when a central bank manipulates the money supply to influence the outcome of elections. A law that requires the money supply to grow by a fixed percentage each year would eliminate both of these problems by making it impossible for the central bank to deviate from its commitment.

A Law That Requires the Money Supply to Grow by a Fixed