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Determine the focal point for coordination
The focal point for coordination is point C, which is the unique symmetrical Pareto efficient outcome. Compared to this outcome the Nash equilibrium now involves both countries setting too fast a growth rate for their domestic money supply. This occurs as each country seeks to bid up the growth rate of its money supply, whilst again ignoring the adverse effects this has on the other country. In this situation such beggar-thy-neighbour policy leads to an expansionary bias.
Discuss about the inflationary bias in the economy As the costs are lower, there is a greater incentive for the government to expand the money supply. Agents perceive this and s
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