The time inconsistency problem arises when
A)attempts are made to coordinate monetary policy throughout different time zones
B)there is a lag between the announcement of a monetary policy and the implementation of it
C)policy makers have an incentive to mislead people about their monetary policy intentions
D)policy makers do not allow enough time for a new policy to take effect
E)there is a deep conflict among monetary policy makers

Question

Quizplus · Accepted Answer

The time inconsistency problem arises when policymakers have an incentive to mislead people about their monetary policy intentions. This happens when policymakers promise to pursue a certain policy to bring about desirable economic outcomes, but later renege on that promise in order to pursue other goals that are more politically expedient. This inconsistency erodes people's confidence in the policymaker's credibility and can ultimately undermine the effectiveness of monetary policy.

The Time Inconsistency Problem Arises When