Conflicting Macroeconomic Policies

Question 1

What are 3 conflicting macroeconomic policies?

Answer 1

1) Fiscal & supply-side policy
2) Fiscal & monetary policy
3) Monetary & supply-side policy

Question 2

How do fiscal and supply side policies conflict?

Answer 2

Expansionary (loose) fiscal policy- spending on education & health (supply side policy) … both work together to ⬆️ AD & future growth prospects

Question 3

How do fiscal and monetary policy conflict and what is unique about these policies?

Answer 3

They’re both demand side policies

Loose (expansionary) Fiscal Policy-> tight (contractionary) monetary policy (budget deficit financed using 90 day treasury bills- ⬆️ liquidity … -> inflation- … to minimise inflationary impacts tight monetary policy adopted- ⬆️ interest rates ⬇️ demand -> ⬇️ inflation)
Tight (contractionary) Fiscal Policy-> loose (expansionary) monetary policy (budget surplus = ⬇️ spending than taxation … demand ⬇️ -> ⬇️ inflation (disinflation) or even deflation … MPC adopts loose policy to ⬆️ demand, growth-> inflation)

KEY 🔑- Note- conflicting policy introduced typically when effects of initial policy too large … consequences too large and negative e.g. very high inflation OR very low inflation (disinflation or even deflation)

Question 4

How do monetary & supply-side policies conflict?

Answer 4

Tight (contractionary) monetary policy-> ⬆️ interest rates-> ⬆️ borrowing costs for firms (prevents investment etc & … ⬇️ future growth) BUT exchange rate may ⬆️-> cheaper imports (raw materials)-> ⬇️ production costs BUT exports ⬆️ expensive … international competitiveness ⬇️- … can benefit firm BUT exchange rate change ✖️ guaranteed

Loose (expansionary) monetary policy-> ⬇️ interest rates-> ⬇️ borrowing costs for firms (⬆️ investment etc & … ⬆️ future growth) BUT exchange rate may ⬇️-> ⬆️ expensive imports (raw materials)-> ⬆️ production costs BUT exports ⬇️ expensive … international competitiveness ⬆️- … can benefit firm BUT exchange rate change possible