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5. Discuss the time inconsistency problem and explain how it relates to monetary policy.

5. Discuss the time inconsistency problem and explain how it relates to monetary policy.

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Answer #1

Ans:- Time inconsistency or dynamic inconsistency is a problem that arises when a policy maker plans to impliment one policy in advance but later passing of time and when situation changes a different policy is being implimented.

Time inconsistency is causing higher inflation rate while taking monetary policy decisions. Time inconsistency can become a problem especially while setting tax policy in an area. Therefore the time inconsistency in monetary policy can affect the average rate of inflation which is prevailing in an economy.

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