Question

In Year 1, the actual budget deficit was $200 billion and the standardized deficit was $150 billion. In Year 2, the actual budget deficit was $225 billion and the standardized deficit was $175 billion. GDP was $1000 billion in Year 1 and $1005 billion in Year 2. It can be concluded that fiscal policy from Year 1 to Year 2 was: 
A. Proportional

B. Inflationary

C. Contractionary

D. Expansionary

Answer 1

Answer: Option (D) is correct.

Explanation:

From the information given in the question, it was observed that fiscal policy in year 2 is expansionary by comparing it with the fiscal policy in year 1.

The budget deficit in year 1 is $200 billion and in year 2 is $225 billion, so there is an increase in the budget deficit from year 1 to year 2. This means that there is an implementation of expansionary policy either by increasing government spending or decreasing taxes.

On the other hand, standardized deficit also increases from year 1 to year 2, which is also an indication of expansionary fiscal policy.