In response to a surge in inflation caused by external supply chain disruptions, the government’s decision to increase spending on infrastructure projects adds fiscal stimulus to the economy. This increase in spending can conflict with monetary policy, particularly if the central bank is already trying to combat inflation through tighter measures such as higher interest rates. The result is likely to exacerbate inflationary pressures because:

• Increased government spending boosts aggregate demand, which can further elevate prices in an inflationary environment.
• Supply-side constraints remain unaddressed, meaning the root cause of inflation persists while demand-side pressures increase.

A is incorrect: Fiscal and monetary policies are misaligned in this scenario, as fiscal expansion undermines monetary efforts to control inflation.

C is incorrect: While the source of inflation is external, domestic fiscal actions can still amplify inflationary pressures by increasing demand.

D is incorrect: Fiscal stimulus impacts short-term economic dynamics by increasing demand, especially during inflationary periods.