If the government is currently running an overall budget deficit, when inflation is rising and unemployment is low, then the cyclically adjusted budget deficit should indicate:
A) a contractionary fiscal stance.
B) an expansionary fiscal stance.
C) a neutral stance.
D) a lower domestic deficit.

Question

Quizplus · Accepted Answer

The cyclically adjusted budget deficit removes the effects of the economic cycle on the budget to show the underlying fiscal stance. If the government is running a budget deficit during a period of rising inflation and low unemployment, it suggests an expansionary fiscal stance, as the government is spending more than it is earning in a time of economic strength, thereby adding to demand.

If the Government Is Currently Running an Overall Budget Deficit