The cyclically adjusted budget deﬁcit in an economy is zero. If this economy goes into recession, then the actual government budget will be
A) balanced.
B) in deﬁcit.
C) in surplus.
D) expanding.

Question

Quizplus · Accepted Answer

A recession will lower tax revenues and increase government spending as automatic stabilizers kick in (e.g. unemployment benefits). This will result in a budget deficit, even if the cyclically adjusted budget deficit was previously zero.

The Cyclically Adjusted Budget Deﬁcit in an Economy Is Zero