In Year 1, the actual budget deﬁcit was $150 billion and the cyclically adjusted deﬁcit was $125 billion. In Year 2, the actual budget deﬁcit was $130 billion and the cyclically adjusted deﬁcit was $125 billion. It
Can be concluded that from Year 1 to Year 2,
A) real GDP decreased.
B) real GDP increased.
C) full employment was attained.
D) ﬁscal policy became less expansionary.

Question

Quizplus · Accepted Answer

The cyclically adjusted deficit remaining constant from Year 1 to Year 2 indicates that the economy was at the same point in the business cycle in both years. However, the actual budget deficit decreased from Year 1 to Year 2, indicating an improvement in the government's fiscal position. This improvement could likely be attributed to an increase in real GDP, resulting in higher tax revenue and lower government spending (e.g. on transfer payments). Therefore, the best choice is B - real GDP increased. Full employment and the state of fiscal policy cannot be determined from the given information.

In Year 1, the Actual Budget Deﬁcit Was $150 Billion