In which case is time-inconsistency most likely to occur?
A) the legislature approves a new budget with a tax increase to correct an overheating economy
B) the central bank conducts open market operations to raise interest rates
C) the European Central Banks buys dollars to alter the euro's exchange rate
D) a monopolist undertakes inventory investment in anticipation of high seasonal sales of its product
E) a consumer undertakes savings in anticipation of retirement

Question

Quizplus · Accepted Answer

Time-inconsistency is most likely to occur when policymakers make decisions that benefit the present at the expense of the future, causing problems in the long run. Option A involves the legislature approving a tax increase to correct an overheating economy, which can be seen as a decision that benefits the present (by cooling the economy) but might not be sustainable in the long run due to potential negative effects on economic growth.

In Which Case Is Time-Inconsistency Most Likely to Occur