This exercise will allow students to explore the concept of time inconsistency as it applies to economic policies. Be sure to explore the credibility problem that results from time inconsistency and the possible impacts on the economy.

Form pairs of students to consider the time consistency of the following statements:

Senator Phil Gramm announces his candidacy for president of the United States, claiming that if elected he will not run for reelection unless he can balance the federal budget.

Alan Greenspan testifies before the U.S. Congress and states that, due to low inflation, he sees no need to raise interest rates any time soon.

Students should consider why the announcement was made and what circumstances could lead to a different plan than the one that is announced. The instructor will call on different pairs to give their interpretation of the time consistency of the announcements.