The cyclically-adjusted deficit as a percentage of GDP is 2 percent in Year 1. This cyclically-adjusted deficit becomes 1 percent of GDP in Year 2. It can be concluded from Year 1 to Year 2 that:
A) Fiscal policy was more expansionary
B) Fiscal policy was more contractionary
C) The Federal government is decreasing taxes
D) The Federal government is increasing spending

Question

Quizplus · Accepted Answer

The decrease in the cyclically-adjusted deficit as a percentage of GDP from 2 percent in Year 1 to 1 percent in Year 2 indicates a reduction in the fiscal deficit over time. This reduction can be attributed to a contractionary fiscal policy, which could involve a reduction in government spending or an increase in taxes. Therefore, the best answer is B, as this option reflects a contractionary fiscal policy. The options C and D are incorrect, as there is no information provided in the question to suggest a decrease in taxes or an increase in spending by the federal government.

The Cyclically-Adjusted Deficit as a Percentage of GDP Is 2