Which of the following describes a cyclically balanced budget?
A) Budget deficits during recessions are covered by budget surpluses during expansions.
B) Budget deficits ensure that the economy produces at its potential output.
C) Budgets are balanced annually, except during war.
D) Budget deficits do NOT occur.

Question

Which of the following describes a cyclically balanced budget?  
A) Budget deficits during recessions are covered by budget surpluses during expansions. 
B) Budget deficits ensure that the economy produces at its potential output. 
C) Budgets are balanced annually, except during war. 
D) Budget deficits do NOT occur.

Quizplus · Accepted Answer

A cyclically balanced budget is one where the government runs a deficit during an economic downturn but has a surplus during an expansion, resulting in a balanced budget over the course of the business cycle. This helps to stabilize the economy during a recession and prevent inflation during an expansion. Option B is incorrect because budget deficits do not necessarily ensure potential output; in fact, they can hinder it if they lead to high levels of government debt. Option C is incorrect because a cyclically balanced budget does not necessarily mean the budget is balanced annually. Option D is incorrect because budget deficits do occur in a cyclically balanced budget.

Which of the Following Describes a Cyclically Balanced Budget