Q. Use the following table to demonstrate the significance of macroeconomic policy coordination. Demonstrate that the two governments would have been happier if the two of them had adopted looser monetary policies however given the policies that the other government did adopt it isn't in the interest of any individual government to change its course. Presume that every country wishes to get the biggest decrement in inflation rate at the lowest cost in terms of unemployment. This indicates that each country maximizes the expression minus the change in inflation divided by the change in unemployment that is the inflation reduction per point of increased unemployment.

Answer: One requires translating the outcomes of the table above into policy payoffs. Assume that every country wishes to get the biggest diminution in inflation rate at the lowest cost in terms of unemployment. This indicates that each country maximizes minus the change in inflation divided by the modification in unemployment the inflation reduction per point of increased unemployment. This initiates the following table. The results of this game are on the lower right hand side of the table where the two countries use extremely restrictive monetary policies rather than cooperating and using the somewhat better restrictive policies for both of them.