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What is Expansionary Bias
The domestic country's bliss point (B) is now below the 45 degree line and the foreign country's bliss point (B1) above the 45 degree line. With separate bliss points we again have a conflict of interest. The domestic country's reaction curve is shown as R, and the foreign country's reaction curve is R1. The Nash equilibrium is where these two curves intersect at point N. Once more this can be seen to be Pareto inefficient, with any point within the shaded region making both countries better off.
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