The government of Montesia had announced that it would keep its money supply unchanged in 2010.However,in 2011,the money supply increased,thereby ruining public expectations.This led to:
A)no problem;this is normal behavior.
B)policy credibility.
C)a time-inconsistency problem.
D)the development of rational expectations.
E)an anticipation about the monetary policy.

Question

Quizplus · Accepted Answer

The situation described in the question is a classic example of a time-inconsistency problem. The government announced that it would keep the money supply unchanged in 2010, which led the public to form expectations about the future course of monetary policy. However, in 2011, the government increased the money supply, which violated the expectations of the public and led to a credibility problem. This situation arises when a government's commitments about future policy are not credible because they have an incentive to renege on them in the future. This creates a problem for the public in forming expectations about future policy, and can lead to suboptimal outcomes.

The Government of Montesia Had Announced That It Would Keep