A nominal anchor helps policy makers to avoid ________.

Question

Quizplus · Accepted Answer

A nominal anchor provides a fixed target to which monetary policy can be directed. This helps policy makers to avoid the time-inconsistency problem, which occurs when they have an incentive to pursue policies that deviate from their initial commitment due to short-term gains, resulting in less effective outcomes in the long run. Nominal anchors can take the form of inflation targets or currency pegs, among others. Therefore, option D is the correct answer because it explicitly refers to this problem. Options A, B, and C are not directly related to the concept of nominal anchors.

A Nominal Anchor Helps Policy Makers to Avoid ________