Question: The following payoff matrix, from Blinder (1983) by way of Bernstein (1996), shows a game between politicians and the Federal Reserve. Politicians can expand or

The following payoff matrix, from Blinder (1983) by way of Bernstein (1996), shows a game between politicians and the Federal Reserve. Politicians can expand or contract fiscal policy, while the Fed can expand or contract monetary policy. (And of course either side can choose to do nothing.) Each side also has preferences for that should do what?neither side wants to look like the bad guys. The payoffs shown are simply the rank orderings: 9 for first choice through 1 for last choice. Find the Nash equilibrium of the game in pure strategies. Is this a Pareto optimal solution? The reader might wish to analyze the policies of recent administrations in this light.

Fed: contract Fed: do nothing Fed: expand Pol: contract Pol: do nothing

Fed: contract Fed: do nothing Fed: expand Pol: contract Pol: do nothing Pol: expand F =8, P = 2 F = 5, P = 5F = 4, P 9. %3D %3D F = 3, P = 3 F = 2, P = 7F = 1, P = 8 %3D

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