What are the ways of aggregate demand policy
To illustrate some of the issues involved in policy coordination we will focus on monetary policy. We discuss three ways in which aggregate demand policy in one country can spillover to affect the welfare of another country. These spillover effects are then illustrated using a modified version of the Mundell-Fleming model under the extreme assumptions of perfectly fixed and perfectly flexible exchange rates. This is done by using a two country model and contrasting the possible outcomes under the alternative assumptions of no coordination and complete coordination. Although there are often potential gains from coordination, there are also problems for countries in realising these gains.