Which of the Following Best Defines Time Inconsistency

question 43

Multiple Choice

Which of the following best defines time inconsistency?

• A)the increasing inaccuracy of econometric models as the time horizon becomes longer
• B)the tendency for the rise in output to be greater in the early years of a president's term, and smaller in the later years
• C)the effects of political electoral cycles on the business cycle
• D)the tendency for policy makers to deviate from a pre-announced optimal policy once agents in the economy have adjusted their behavior and expectations based on the pre-announced policy
• E) the effect of economic uncertainty on short-run stabilization policy

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Definitions:

PI

Stands for Profitability Index, which measures the ratio of payoff to investment of a proposed project.

Dividends

Earnings distributed by an enterprise to its proprietors, commonly resulting from the firm's profit margins.

Constant Growth Rate

The steady rate at which a company’s dividends are expected to grow, often used in valuing stocks with the Gordon Growth Model.

Expected Value

The weighted average of all possible values for a given set of probabilities, used in statistics and financial decision making.