Final answer:
A Keynesian economist may support higher taxes and interest rates as part of a stabilization policy to manage rampant inflation, by reducing aggregate demand. Monetary policy is also a key tool for keeping inflation in check in the medium to long term, especially in high-income economies. The approach to debt and inflation would depend on the current economic conditions, specifically if the output is above or below potential GDP.
Step-by-step explanation:
If the economy is suffering through a rampant inflationary period, a Keynesian economist might advocate for a stabilization policy that involves higher taxes and higher interest rates to cool down the economy. Keynesian economics suggests that, during periods of high inflation, governments should reduce aggregate demand through fiscal and monetary policies. This can be achieved by increasing taxes, which would reduce consumers' disposable income and thereby their spending. Similarly, by raising interest rates, borrowing becomes more expensive, which can dampen investment and spending as well.
Furthermore, it's important to recognize that high inflation can lead to a cycle of continuous price hikes that can undermine economic stability. Monetary policy plays a crucial role in preventing inflation from becoming entrenched. In high-income economies, there's a tendency to use such policies to ensure that inflation remains low over the medium and long term, recognizing the lack of long-term benefits from persistent inflation.
In context, policymakers use a mix of fiscal and monetary strategies to fight inflation, which may include higher taxes and increased interest rates when necessary. However, the response to rising debt-to-GDP ratios and their inflationary impact might require a nuanced approach depending on whether economic output is above or below potential GDP.