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 remained constant at $125 billion from Year 1 to Year 2, indicating that the economy was operating at its potential level of output and full employment was maintained. However, the actual budget deficit decreased from $150 billion in Year 1 to $130 billion in Year 2, indicating that fiscal policy became less expansionary. This suggests that either tax revenue increased, government spending decreased, or a combination of both occurred, which could have led to an increase in Real GDP.

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