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Explain in detail about the policy co-ordination of each country
With no policy coordination each country will attempt to maximise its own welfare, taking the other country's monetary policy as given. This implies that each country seeks to be on its own reaction function. These are shown for the domestic and foreign countries as R and R1 respectively. For the domestic country its reaction function cuts its indifference curves where they are horizontal. This curve, therefore, shows where domestic welfare is maximised for variations in foreign monetary policy.
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