To prevent a recessionary gap from occurring when the economy is currently in an inflationary gap, the government can take several actions. Here’s a breakdown of the options provided:
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Ensure that the price level is flexible downward. - This step promotes the economy's ability to adjust to reduce inflation, but it doesn't directly prevent a recessionary gap from occurring during an inflationary gap.
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Remember that with the price level fixed, the multiplier will be in full effect. - This is more of a recognition of how fiscal policy works under certain conditions rather than a direct action to prevent a recessionary gap.
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Calculate an initial change in government spending times the multiplier. - This is relevant in terms of understanding the impact of fiscal policy, but calculating this alone won't necessarily prevent a recessionary gap; it's what the government does with that information that matters.
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Determine the size of the inflationary GDP gap. - This is a critical step to understanding the extent of the problem. Knowing the size of the inflationary gap helps in formulating an appropriate response to eliminate excess demand in the economy, which can potentially prevent entering into a recession.
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Negate the multiplier effect. - Negating the multiplier effect would typically involve tightening fiscal policy (e.g., reducing government spending or increasing taxes) to counteract inflation. This could prevent the economy from overheating further and might mitigate the need to address a future recessionary gap.
Based on these considerations, the more action-oriented options that could help in managing the economy effectively from an inflationary gap to avoid a recessionary gap would be to determine the size of the inflationary GDP gap and potentially negate the multiplier effect through policy measures.
So, the most appropriate steps to select would be:
- Determine the size of the inflationary GDP gap.
- Negate the multiplier effect.