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, policymakers are tempted to raise inflation in order to lower unemployment and gain favour with voters.
B) It means that sometimes 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

Time inconsistency of monetary policy refers to a situation where policymakers may go back on their promises to maintain low inflation in order to pursue other goals, such as reducing unemployment or gaining political favour. This creates a problem of credibility and can lead to higher inflation expectations in the future.

What Does the Time Inconsistency of Monetary Policy Mean