What Does the Time Inconsistency of Policy Imply

question 42

Multiple Choice

What does the time inconsistency of policy imply?

• A) It implies that what policymakers say they will do is generally what they will do, but people don't believe them because of current policy.
• B) It implies that when people expect that inflation will be low, it is harder for the Bank of Canada to increase output by increasing the money supply.
• C) It implies people always expect more inflation than policymakers claim they are trying to achieve.
• D) It implies that the Bank of Canada coordinates its actions with elected officials.

---

Definitions:

Price Level

A measure of the average prices of goods and services in an economy, indicating the cost of living or inflation rate.

Falling Prices

A situation in an economy where the prices of goods and services decrease over time.

Extraordinarily High Inflation

A situation where the rate of inflation becomes extremely high and uncontrollable, eroding purchasing power and destabilizing the economy.

Budget Deficit

The financial situation where government’s expenditures exceed its revenues within a specific time period, leading to borrowing or debt accumulation.