Question

Suppose the government purposely changes the economy's cyclically adjusted budget from a deficit of 3 percent of real GDP to a surplus of 1 percent of real GDP. The government is engaging in a(n) ____

Answer 1

Answer:

Contractionary Fiscal Policy is the correct answer.

Explanation:

It is a fiscal policy that includes increasing taxes and decreasing the expenditure to curb inflationary pressures. As the taxes are increased, households have less income to spend and the lower disposable income affects consumption. Tax increments also lead to less profit for businesses. GDP includes the consumption and private investment hence both of them fall as a result. The government tries to magnify the fall in GDP with the multiplier effect.

If the government decreases the expenditures then it would lead to a decrease in GDP, as the government expenditures are a part of GDP.