Question

Problem 7 (5 pts) (Russell and Norvig) The following payo matrix shows a game between

politicians and the

Federal Reserve in the US:

Fed: contract Fed: do nothing Fed: expand

Pol: contract 1,7 4,9 6,6

Pol: idle 2,8 5,5 9,4

Pol: expand 3,3 7,2 8,1

The politicians can expand (increase spending) or contract (cut spending) scal policy (or

stay idle), while the Fed can expand (lower interest rate) or contract (increase interest rate)

monetary policy (or do nothing). Find the Nash equilibria of this game.