Four Solutions . Eirst-Best Allocation: government is allowed to manipulate agents g expectation to achieve zero unemployment and inflation . Cheating (Time-Inconsistent) Solution: government would like to deviate from her precommitment because she always has incentive to reduce unemployment by unexpected inflation &Precommitment Solution government is assumed to commit to her ex-ante announced policy. &s Time Consistent Solution government is unable to commit to her policy 复9大学经学院 wElfare Comparison❖ First-Best Allocation: government is allowed to manipulate agents’ expectation to achieve zero unemployment and inflation. ❖ Cheating (Time-Inconsistent) Solution: government would like to deviate from her precommitment, because she always has incentive to reduce unemployment by unexpected inflation. ❖ Precommitment Solution: government is assumed to commit to her ex-ante announced policy. ❖ Time Consistent Solution: government is unable to commit to her policy. ❖ Welfare Comparison: 1 > 2 > 3 > 4 Four Solutions