Which of the following best defines time inconsistency?
A)the increasing inaccuracy of econometric models as the time horizon becomes longer
B)the tendency for the rise in output to be greater in the early years of a president's term, and smaller in the later years
C)the effects of political electoral cycles on the business cycle
D)the tendency for policy makers to deviate from a pre-announced optimal policy once agents in the economy have adjusted their behavior and expectations based on the pre-announced policy
E) the effect of economic uncertainty on short-run stabilization policy

Question

Quizplus · Accepted Answer

Time inconsistency refers to the tendency for policy makers to deviate from a pre-announced optimal policy once agents in the economy have adjusted their behavior and expectations based on the pre-announced policy. This is because the policy maker faces different incentives when making the pre-announcement and when implementing the policy, leading to a divergence between the announced and actual policy.

Which of the Following Best Defines Time Inconsistency