. What is meant by the terms policy agreement and policy conflict?

Expert Solution

Answer :-

Policy agreement occurs when a given policy can improve two or more economic objectives at the same time.

Policy conflict occurs when a given policy improves one objective while detracting from another objective, a dilemma thus exists concerning which objective to pursue.

For example, if a country operating under a floating exchange rate system is both in recession and suffering a current account deficit, then an expansionary monetary policy will exhibit policy agreement, since a lower interest rate can help address both problems.

On the other hand, an expansionary fiscal policy will exhibit policy conflict in this scenario, since the increased incomes that arise from increased government spending or lower taxes will stimulate imports, worsening the current account balance.

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