Question

The cyclically adjusted budget deficit is the deficit in the federal​ government's budget​ if: A. there were an amendment requiring tax revenue to be equal to government expenditures. B. the economy were at potential GDP. C. the economy were above potential GDP. D. the economy were below potential GDP.

Answer 1

Answer:

B. the economy were at potential GDP.

A cyclically adjusted deficit is a budget deficit caused by a slowing economy rather than fiscal policies such as increasing discretionary spending or decreasing the tax rates.

Explanation:

The cyclically adjusted budget deficit or surplus is the deficit or surplus in the federal government budget if the economy were at potential GDP. The federal budget deficit is the year-to-year shortfall in tax revenues relative to government spending (T < G+TR), financed through government bonds.

A budget deficit implies lower taxes and increased Government spending (G), this will increase AD and this may cause higher real GDP and inflation. For example, in 2009, the UK lowered VAT in an effort to boost consumer spending, hit by the great recession.

Answer 2

Answer:

B. The economy was at the potential GDP

Explanation:

It is a calculation of what the government's budget deficit would be if the economy was at a normal level of activity and this is achieved by assuming that the rules and rates concerning spending and taxes are unchanged.