Question

Conflicting Monetary and Fiscal Policies

We have yet to fully define the makeup and design of the Federal Reserve system, but during our discussions of the problems relating to fiscal policy the fact it sometimes conflicts/coincides with monetary policy was mentioned. I would like each of you to research the history of any/all such instances of when these policies either conflicted or coincided with one another and write a one-page summary of one occurrence. Be sure to include examples of the real-world effects this situation created on our economy.

Answer 1

The monetary and fiscal policy conflict is a situation where one economic objective is achieved at the cost of other objectives like increase in interest rate for loans would prevent inflation but it would not be beneficial for the poor people .The majority amount of econimic policy conflicts are associated with monetary and fiscal policies as they try to regulate the aggregate demand.

There can be situations like the policy used is to reduce the interest on loans so that people willl have more money and the aggregate demand willl increase but it would further lead to the inflation and also expansionary demand side policies increase the consumption and economic growth but eventually leads to the trade defecit.Reduce of marginal taxes which is a supply side policy does stimulates the enterprize and economic growth but it gives the rise to inequality.These situations arises in the real world economy and due to which central banks have to act like the master in the situation .

There was a conflict which arouse due to central banks stance on bonds purchase.The rate of bonds yields had alrady been running up in 2017 from the september over government finances ,the bonds were giving high rate of return to central bank but in may 2018 RBI decided to sell the bonds through open market operation to control the inflation in the economy .There were many questions raised as to why the profit earning bonds were sold and the officials of the RBI replies that purchasing and selling of the bonds is just subsidiary activity of the RBI but in the scenario they lost the bonds to control the liquidity.