Determine the expansionary monetary policy
The possible spillover effects associated with expansionary monetary policy. In particular with fixed exchange rates expansionary monetary policy in country A leads to increased national income in both countries. Assuming this increases welfare in country B we can state there is a positive spillover effect from country A to country B. This contrasts with the result derived under flexible exchange rates where an expansionary monetary policy in country A, reduces national income in country B. This is a typical example of a beggar-thy-neighbour policy. With welfare being reduced in country B we have a negative spillover effect from country A. Although these example are useful in highlighting various possibilities it is important to realise that these results are model specific. With a different set of assumptions these spillover effects may be negated or reversed.