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Which of the following are steps the government can take to prevent a recessionary gap from occurring when it currently is in an inflationary gap?

Multiple select question.

Negate the multiplier effect.

Calculate an initial change in government spending times the multiplier.

Remember that with the price level fixed, the multiplier will be in full effect.

Determine the size of the inflationary GDP gap.

Ensure that the price level is flexible downward.

1 answer

To prevent a recessionary gap from occurring while currently in an inflationary gap, the government can take the following steps:

  1. Negate the multiplier effect. - This could involve measures that reduce spending in the economy, which would counteract the inflationary pressures.

  2. Determine the size of the inflationary GDP gap. - Understanding the extent of the inflationary gap can help the government formulate appropriate policies to address the situation.

  3. Ensure that the price level is flexible downward. - Allowing prices to adjust downwards can help moderate inflation and reduce the gap.

The other two options do not directly relate to preventing a recessionary gap from an inflationary gap:

  • Calculate an initial change in government spending times the multiplier. - This step may be more relevant to stimulus measures rather than contractionary actions needed to address an inflationary gap.

  • Remember that with the price level fixed, the multiplier will be in full effect. - This relates more to the understanding of how fiscal policy can affect output, but does not address preventing a recessionary gap specifically.

In summary, the relevant steps would include "Negate the multiplier effect," "Determine the size of the inflationary GDP gap," and "Ensure that the price level is flexible downward."