This paper uses Ray Fair’s US model to simulate the effects of monetary and fiscal policy responses to the current financial crisis in a strategic setting. The Fair model forecasts are used to obtain ten potential payoffs for two- or three-player games involving the government, business and household sectors. A graphical user interface (GUI) created in Mathematica is used to select players, payoffs and conduct dynamic “what if” analyses using Mathematica’s interactive manipulation capabilities. The end user chooses the payoffs for households (i.e., wealth, disposable income, and consumption), firms (i.e., corporate profit, plant and equipment, total capital stock) and public sector (i.e., inflation, unemployment, budget deficit, and a “misery index” that provides a weighted average of inflation and unemployment). In the game of public sector versus business sector the four by three payoff matrix corresponds to public strategies of status quo policies, increasing transfer payments, reducing the corporate profit tax, or combining increased transfer payments and reduced corporate taxes. The business sector payoffs are to cut, increase or decrease expenditure on plant and equipment.
The Mathematica package, Nash.m, by Dickhaut and Kaplan is used to solve for all pure and mixed strategy Nash equilibria of the game. The game is also shown in extensive form and, in cases of multiple pure-strategy solutions, the path to the subgame perfect Nash is highlighted. When viewed as a dynamic game the user can alter the order of play among the players and observe how this affects the equilibrium selection. The GUI lets the user explore the effects of the selection of payoffs or policy objectives on the outcome of the game. A slider bar allows the user to simulate the effects of changing parameters in the consumption equations of the Fair model. This capability is used to illustrate situations in which increased household efforts to save can have the unintended consequence of moving the Nash equilibrium to a combination of strategies that may make the parties worse off than they would have been in the absence of counter-cyclical policy.