Suppose that the government and the Federal Reserve have conflicting goals. The government wants to encourage economic growth by _. But the Federal Reserve wants to decrease inflation by _.

(1.increasing spending, decreasing the money supply) (2.increasing taxes, decreasing the money supply)(3. decreasing spending, increasing the money supply)

The main instruments of economic policy are monetary policy and fiscal policy. Both can be used to stimulate or discourage the economy. In this way, when they are adopted with the opposite sign, they are an example of conflict, as described in this exercise.

If the government wants to stimulate the economy through increased spending (expansionary fiscal policy), it will be injecting money into the economy. However, the main cause of inflation is excess currency in circulation. Thus, a contractionary monetary policy aims to wipe out the supply of money to contain inflation. That is, the first measure is inflationary to stimulate the economy, but the second is anti-inflationary, however contractionary.

"Suppose the government and the Federal Reserve have conflicting goals. The government wants to encourage economic growth by increasing spending, but the Federal Reserve wants to decrease inflation by decreasing the money supply".