The temptation to engage in dynamic inconsistency can be minimized by
A)being more concerned with short-run outcomes than long-run outcomes
B)the desire to achieve credibility
C)employing policy responses that are right for current disturbances without much concern over long-run objectives
D)never announcing any proposed policy actions
E)none of the above

Question

Quizplus · Accepted Answer

The desire to achieve credibility can minimize the temptation to engage in dynamic inconsistency, as credibility requires consistency between one's current and future actions. If a policymaker is known for frequently changing their policies or abandoning their commitments, their credibility will be undermined, making it harder for them to achieve their goals in the future. Therefore, the desire to maintain credibility can reduce the temptation to engage in dynamic inconsistency. The other choices suggest strategies that prioritize short-term gains or neglect long-term objectives, which can increase the likelihood of dynamic inconsistency.

The Temptation to Engage in Dynamic Inconsistency Can Be Minimized