When the central bank chooses a policy at one date, which leads people to make decisions based on that policy, which then causes the central bank to choose a different policy at a later date, then there is said to be
A)irrational expectations.
B)time inconsistency.
C)a liquidity trap.
D)an expectations trap.

Question

Quizplus · Accepted Answer

This situation is referred to as time inconsistency, as the central bank's policy at the initial date causes people to make certain decisions, which make the initial policy less effective or undesirable at a later date, leading the central bank to choose a different policy.

When the Central Bank Chooses a Policy at One Date