Growth rate of the money supply in the domestic economy, Business Law and Ethics

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Growth rate of the money supply in the domestic economy

On the horizontal axis is the growth rate of the money supply in the domestic economy, M. On the vertical axis is the growth rate of the money supply in the foreign country, M1. With spillover effects a country's welfare will be determined by the policy stance within both countries. In particular the only way that either country can achieve a balance of payments surplus is for its money supply is expanded slower than the other country's. Clearly in this two country model both countries cannot simultaneously run a balance of payments surplus. This represents a serious conflict of interest.


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