If the government thinks the natural unemployment rate is 5%,when it is really 6%,then the government will
A)overestimate the actual deficit.
B)underestimate the actual deficit.
C)overestimate the cyclically adjusted deficit.
D)underestimate the cyclically adjusted deficit.
E) none of the above

Question

Quizplus · Accepted Answer

If the government believes the natural unemployment rate is lower than it actually is, it will likely overestimate tax revenues and underestimate welfare payments, leading to an overestimation of the cyclically adjusted deficit. This is because the cyclically adjusted deficit takes into account the economic cycle's position, and with a higher actual unemployment rate, the economy is likely performing below potential, which isn't fully accounted for.

If the Government Thinks the Natural Unemployment Rate Is 5%,when