Question

If there is a GDP gap of 1 trillion yen and the MPC is 0.6, what advice should the head of the economic council give the prime minister? Formulate the question in an open-ended format.

Answer 1

To relieve inflationary pressures when aggregate expenditure exceeds potential GDP, the government should use contractionary fiscal policies such as decreasing government spending or increasing taxes.

Step-by-step explanation:

To relieve inflationary pressures when aggregate expenditure exceeds potential GDP, the government can use contractionary fiscal policies. These policies aim to decrease aggregate demand and bring it back in line with potential GDP. One approach is to decrease government spending or increase taxes to reduce the amount of money circulating in the economy. Another approach is to decrease government transfers or increase interest rates to discourage borrowing and spending. By implementing these measures, the government can help reduce inflationary pressures and maintain a stable economy.