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

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

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


Answer & Explanation (1)

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Internal balance happens in an economy when unemployment and inflation is negligible. External balance happens when current and capital accounts deficit of the economy are zero.


When a single policy can help to maintain full employment without inflation and external balance such that the current account deficit is zero. Hence policy agreement occurs in this case. Policy conflict occurs when single policy is not sufficient to restore internal or external balance.
For a country suffering from recession and current account deficit, an expansionary monetary policy can help curb recession and current account deficit as increase in money supply in the economy will result in currency depreciation making exports relatively cheaper.Hence will restore both internal and external balance.
However a contractionary monetary policy will result in rising interest rate and currency appreciation. This will make exports relatively expensive and will widen the current account deficit. Hence resulting in a policy conflict.

Verified Answer

Policy agreement occurs when a single policy promotes overall balance, while policy conflict occurs when monetary or fiscal policy alone does not restore internal and external balance.

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