A law that requires the money supply to grow by a fixed percentage each year would eliminate
A)the time inconsistency problem, but not political business cycles.
B)the political business cycle, but not the time inconsistency problem.
C)both the time inconsistency problem and political business cycles.
D)neither the time inconsistency problem nor political business cycles.

Question

Quizplus · Accepted Answer

A rule that requires the money supply to grow by a fixed percentage each year would eliminate both the time inconsistency problem and political business cycles. The time inconsistency problem arises when a central bank makes a commitment to a future policy that it has no incentive to keep. A rule that requires the money supply to grow by a fixed percentage each year would eliminate this problem because the central bank would have no incentive to deviate from the rule. Political business cycles arise when a central bank uses monetary policy to influence the outcome of elections. A rule that requires the money supply to grow by a fixed percentage each year would eliminate this problem because the central bank would not be able to use monetary policy to influence the outcome of elections.

A Law That Requires the Money Supply to Grow by a Fixed