The Existence of the Time Inconsistency Problem in Macro Policy

question 4

Multiple Choice

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) Appoint someone who is more conservative than the rest of the government to head the central bank.
• C) Intervene frequently in the foreign exchange market.
• D) Reduce the independence of the central bank.
• E) Eliminate rational expectations from econometric models used for forecasting.

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Definitions:

Emotional Stability

A personality trait indicating the ability to remain calm and composed under stress, experiencing emotions without excessive negativity.

Conscientious

Characterized by being diligent, careful, and meticulous; often associated with a strong sense of duty and responsibility.

Rank-Order Reversal

An occurrence where the position of individuals or items in a ranked list changes significantly, indicating a change in their relative standings or magnitudes over time.

Cumulative Continuity

refers to the psychological concept that personality traits become more stable and pronounced over time through the accumulation of consistent patterns of thoughts, feelings, and behaviors.