What Does the Time Inconsistency of Monetary Policy Mean

question 104

Multiple Choice

What does the time inconsistency of monetary policy mean?

• A) It means that once people have formed expectations of low inflation, based on a promise by the central bank, policymakers are tempted to raise inflation in order to lower unemployment and gain favour with voters.
• B) It means that sometimes central banks think it is more important to keep unemployment low; at other times, they think it is more important to keep inflation low.
• C) It means that monetary policy is not consistent across time because it is influenced by politics.
• D) It means that monetary policy cannot be consistent across time because the rate of inflation is fluctuating.