Discuss the time inconsistency problem and explain how it relates to monetary policy
What will be an ideal response?
The time inconsistency of optimal policy refers to game theory situations where an agent has an incentive to deviate from some stated rule/policy. In terms of monetary policy, central banks will typically announce certain goals (e.g. policies consistent with a certain rate of inflation). Once such a policy is announced, the central bank might have an incentive to deviate from this policy and increase money growth in excess of the rate consistent with its inflation goal. There would be some increase in inflation; however, there would be a significant increase in output.
You might also like to view...
According to this Application, by using a value-added approach to measure Wal-Mart's sales impact on the economy, we are
A) including GDP as a measure of welfare. B) using a chain-weighted index. C) avoiding double-counting. D) excluding the net foreign sector.
When Fred's income was $100 per week, 10 units of good X were demanded. Now his income is $150 per week and 12 units of good X are demanded. Using the percentage change formula, the income elasticity of demand for good X equals
A) 0.45. B) 0.40. C) 2.20. D) 2.50.