Suppose the government purposely changes the economy's cyclically adjusted budget from a deﬁcit of 3 percent of real GDP to a surplus of 1 percent of real GDP. The government is engaging in a(n)

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A cyclically adjusted budget refers to the government's budget if the economy is operating at full employment. A change from a deficit of 3 percent of real GDP to a surplus of 1 percent of real GDP indicates a reduction in government spending and/or an increase in taxes, which would reduce overall aggregate demand in the economy. This type of policy is known as contractionary fiscal policy, as it is intended to slow down economic growth and reduce inflationary pressures.

Suppose the Government Purposely Changes the Economy's Cyclically Adjusted Budget