The cyclical deficit arises only because real GDP does not equal potential GDP. This means that during periods of economic downturns, actual output falls below the potential output, resulting in a decrease in tax revenues and an increase in government spending on social safety nets. This leads to a cyclical deficit, which is temporary and disappears as the economy recovers.

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The Cyclical Deficit

Question 129

Multiple Choice

The cyclical deficit

A) is a persistent economic fact.
B) occurs when the economy is at full employment.
C) arises only because real GDP does not equal potential GDP.
D) is an accumulation of the government debt.
E) is none of the above.

Correct Answer: