Monetary and Fiscal Interaction between Europe and America: Case A

Abstract

The world economy consists of two monetary regions, say Europe and America. The monetary regions are the same size and have the same behavioural functions. An increase in European money supply lowers European unemployment. On the other hand, it raises European inflation. Correspondingly, an increase in American money supply lowers American unemployment. On the other hand, it raises American inflation. An essential point is that monetary policy in Europe has spillover effects on America and vice versa. An increase in European money supply raises American unemployment and lowers American inflation. Similarly, an increase in American money supply raises European unemployment and lowers European inflation.