Which of the following explains the time-inconsistency of policy explained by Kydland and Prescott?

Question

Quizplus · Accepted Answer

Kydland and Prescott's time-inconsistency problem arises when policymakers promise low inflation to the public but then face the temptation to raise inflation to reduce unemployment in the short run. If the public anticipates this behavior, they will expect higher inflation in the future, leading to higher inflation expectations and possibly higher actual inflation. Therefore, option C, which states that inflation expectations will be higher if the public believes that policymakers would raise inflation to reduce unemployment, best explains the time-inconsistency problem identified by Kydland and Prescott.

Which of the Following Explains the Time-Inconsistency of Policy Explained