Final answer:
To combat a decline in GDP due to increased taxes, lowering interest rates is typically the most effective monetary policy. Japan's case shows that despite aggressive monetary easing in the 1990s and 2000s, and Shinzo Abe's fiscal and monetary policies in the 2010s, the economy faced persistent challenges with slow growth and high public debt.
Step-by-step explanation:
In response to the question regarding the impact of rising taxes in Japan during 1997 and the appropriate monetary policy to combat a decline in GDP, the most effective approach in such a situation would typically be to lower interest rates. A lower interest rate allows for cheaper borrowing costs, which can encourage spending and investment, thereby potentially stimulating the economy. This action is in contrast to raising interest rates, which would generally slow economic activity even further, or increasing taxes, which could reduce consumption and investment. Implementing stricter trade policies is not directly related to domestic monetary policy, and could have complex effects that may not address the immediate issue of a decline in GDP.
Japan's historical context illustrates a more nuanced scenario. In the 1990s and early 2000s, even when Japan had adopted a highly expansionary monetary policy, with near-zero interest rates and a significant increase in the money supply, it still faced difficulties in stimulating aggregate demand and achieving economic growth. Following Shinzo Abe's economic strategies in the 2010s, which combined fiscal stimulus with monetary expansion, there were mixed results. Some short-term improvements were noted, but significant challenges remained, such as high public debt and tepid GDP growth.