The actual budget may be in deﬁcit while the cyclically adjusted budget is in surplus.

Question

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This situation can occur when the economy is in a downturn, causing tax revenues to decrease and government spending on unemployment benefits to increase. However, if the economy were to improve, the actual budget could return to surplus. The cyclically adjusted budget takes into account these fluctuations in the economy and is a better indicator of the government's long-term fiscal policy.

The Actual Budget May Be in Deﬁcit While the Cyclically