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.

---

Definitions:

Unexpected News

Information that comes without warning, often having a potential impact on market prices and investor decisions.

Efficient

Describes an economy, market, or decision-making process that effectively allocates resources and inputs in a way that maximizes output or returns with minimal waste.

Semi-Strong Efficiency

A form of market efficiency that asserts all public information is reflected in stock prices, making it impossible to gain abnormal returns.

Insider Information

Non-public information about a publicly-traded company that can provide a financial advantage in the stock market if acted upon.