The time inconsistency of policy implies that
A)what policymakers say they will do is generally what they will do,but people don't believe them because of current policy.
B)when people expect that inflation will be low,it is easier for the Fed to increase output by increasing the money supply.
C)people will believe Fed policy will be less inflationary than the Fed claims.
D)what policymakers say they will do is usually not what they do,but people believe them anyway.

Question

Quizplus · Accepted Answer

The time inconsistency of policy refers to the fact that policymakers may promise to implement a certain policy, but then change their minds when the time comes to actually implement it. This can lead to distrust among the public and affect the effectiveness of the policy. Choice B is correct because if people expect low inflation, the Fed may be more likely to increase output by increasing the money supply, which could lead to higher inflation in the long run. Choices A, C, and D are incorrect.

The Time Inconsistency of Policy Implies That