If the government thinks the natural unemployment rate is 7%, when it is really 6%, then the government will:
A) underestimate the actual deficit.
B) overestimate the cyclically adjusted deficit.
C) overestimate the actual deficit.
D) underestimate the cyclically adjusted deficit.
E) underestimate the primary deficit.

Question

Quizplus · Accepted Answer

The natural unemployment rate is used to calculate the potential output level and the cyclically adjusted deficit. If the government thinks the natural unemployment rate is 7% when it is really 6%, then they will overestimate the cyclically adjusted deficit because they will believe that there is more unemployment due to a cyclical downturn in the economy than there actually is.

If the Government Thinks the Natural Unemployment Rate Is 7