Question

Suppose that expansionary monetary policy had no effect whatsoever on employment or output in either the short or long run; that is, suppose that monetary policy only affected the price level. And, suppose further that everyone understood this to be true. Would the central bank be more or less vulnerable to the time-inconsistency trap in this case? Please defend your reasoning.

Answer 1

ANSWER:-

• Time inconsistency is the issue when an policy producer vows to execute one policy  however later chooses to take on another policy.
• Assume there is inadmissible swelling in the economy and individuals accept that monetary policy won't help and in this way they don't rely upon central, rather they slice back consumptions to diminish further increments in price level.
• Presently assume with some enchantment expansion gets decreased without central bank busy. Presently he needs to take choice of lessening loan rate to diminish swelling. Presently central bank falls into trap between choosing to pick its policy activity and really actualizing it, in such a case that he does it he may trigger downturn and on the off chance that he doesn't do it he will be disparaged by the individuals.
• So yes central bank is increasingly vulnerable against time-inconsistency trap.

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