Discuss the time inconsistency problem and explain how it relates to monetary policy
What will be an ideal response?
The time inconsistency of optimal policy refers to game theory situations where an agent has an incentive to deviate from some stated rule/policy. In terms of monetary policy, central banks will typically announce certain goals (e.g. policies consistent with a certain rate of inflation). Once such a policy is announced, the central bank might have an incentive to deviate from this policy and increase money growth in excess of the rate consistent with its inflation goal. There would be some increase in inflation; however, there would be a significant increase in output.
You might also like to view...
How would poverty be affected in the United States if the measure were changed to a more comprehensive one that included the value of in-kind transfers, medical services, and taxes?
What will be an ideal response?
Figure 18-1
According to the graph in Figure 17-1, tax collections will be which of the following?
A. 14 million B. 1.4 million C. 12 million D. 1 million
Which of the following refers to a short run phenomenon?
A. diminishing returns B. economies of scale C. constant returns to scale D. diseconomies of scale
The number of times per year that a dollar is spent on final goods and services defines
A) the income velocity of money. B) the money supply. C) the price index. D) GDP.