Answer to Question 1
The key to finding Nash equilibrium in a matrix game is to follow the logic of finding best responses. Once the best response of each player to the strategies of the other player is determined, we need to check if either player has an incentive to change his or her strategy. If each player follows his best responses to the strategies of other players, none of them will have an incentive to change their strategies and thus Nash equilibrium will be reached.
Answer to Question 2
There is an inflationary gap because real GDP exceeds potential GDP. In this situation, the money wage rate will rise, shifting the aggregate supply curve leftward and raising the price level. Eventually the economy will return to potential GDP. At this time, real GDP is lower than when the inflationary gap existed but the price level is higher.
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