The existence of the time inconsistency problem in macro policy suggests which of the following?
A)use fiscal and monetary policy to fine tune the economy.
B)reduce the independence of the central bank.
C)appoint someone who is more conservative (economically)than the rest of the government to head the central bank.
D)intervene frequently in the foreign exchange market.
E)eliminate rational expectations from econometric models used for forecasting.

Question

Quizplus · Accepted Answer

Appointing a conservative central bank head can help mitigate the time inconsistency problem by committing to low inflation policies, thus enhancing credibility and reducing the temptation to deviate from long-term goals for short-term gains.

The Existence of the Time Inconsistency Problem in Macro Policy