The time inconsistency of monetary policy means that
A)once people have formed expectations of low inflation based on a promise by the central bank,the central bank is tempted to raise inflation to lower unemployment.
B)at some times 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)monetary policy is not consistent across time because it is influenced by politics.
D)monetary policy is not consistent across time because policymakers are incompetent.

Question

Quizplus · Accepted Answer

The time inconsistency of monetary policy refers to the tendency of policymakers to deviate from their announced policy when the actual economic conditions change. For example, if the central bank promises to maintain low inflation, but then the economy experiences high unemployment, the central bank may be tempted to raise inflation to lower unemployment. This results in the loss of credibility of the central bank's policy, as people will now expect higher inflation in the future.

The Time Inconsistency of Monetary Policy Means That