Which best describes the time inconsistency problem in economic policy?

Which best describes the time inconsistency problem in economic policy?

Options:

1. Policymakers commit to a policy but later have an incentive to deviate, undermining credibility
2. A policy that is constant over time despite changing economic conditions
3. When private firms change prices too slowly in response to shocks
4. An economy that cannot adjust wages due to institutional rigidities

Correct answer: Policymakers commit to a policy but later have an incentive to deviate, undermining credibility

Explanation: Time inconsistency occurs when policymakers promise one policy but later prefer a different action, reducing credibility; Kydland and Prescott formalized this problem in their 1977 paper on discretionary policy.

Created 2026-03-10T18:51:15.174Z. Updated 2026-03-10T18:51:15.174Z.