Question

Explain Time Inconsistency. What does it predict about the Fed’s ability to achieve a stable money supply and full employment?

Answer 1

Time inconsistency refers to the situation where the preference for a decision changes over time so what is deemed relevant for future now might not be relevant in the future. In Fed's objective of stable money supply and full employment decisions taken in present to course correct future might not be the preferred decision in the future which poses a challenge to Fed since the market dynamics is constantly evolving and can not be accurately predicted at a given point big tume. This leads to recalibration of decision-making on a continuous basis.