Using the U.S. as an example, explain why rising budget deficits on the part of a federal government creates a potential point of conflict between fiscal and monetary policymakers.

Question

What will be an ideal response?

Answer 1

Members of Congress and the President have a short-term view of policy. Their time horizon is usually the next election. As a result when it comes to budget matters they would prefer not to raise taxes and at the same time, any member of Congress will not want to reduce spending in his or her district or state, even if this deficit spending may raise interest rates and/or the inflation rate. As a result, one could argue that Congress would be prone to run budget deficits preferring to push the problem of paying for government programs well into the future. Monetary policymakers, on the other hand, have a long time horizon and worry about inflation. On the matter of budget finance it is often the situation that Congress, the President and the Chairman of the Fed can have opposing views on its significance and how it should be dealt with.