Discuss the time inconsistency problem and explain how it relates ...

[hubes95]

Discuss the time inconsistency problem and explain how it relates to monetary policy.
 
  What will be an ideal response?

Question 2

Which of the following best describes a situation where research is considered relatively fertile?
 
  A) research that translates into many new products
  B) research that costs the firms relatively little money
  C) research that cannot be easily copied by other firms
  D) all of the above
  E) none of the above

[Fayaz00962]

Answer to Question 1

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.

Answer to Question 2

A

[hubes95]

YES! Correct, THANKS for helping me on my review

[Joy Chen]

Thanks for the timely response, appreciate it