Without a change in discretionary ﬁscal policy, we would expect that if the economy goes into recession, then the
A) cyclically adjusted deﬁcit and the actual deﬁcit would both increase.
B) cyclically adjusted deﬁcit and the actual deﬁcit would both decrease.
C) cyclically adjusted deﬁcit would stay the same while the actual deﬁcit would increase.
D) cyclically adjusted deﬁcit would increase while the actual deﬁcit would stay the same.

Question

Quizplus · Accepted Answer

The cyclically adjusted deficit is designed to show the deficit at a given level of economic activity, removing the effects of the economic cycle. In a recession, without a change in discretionary fiscal policy, the actual deficit would increase due to lower tax revenues and higher automatic stabilizer spending (like unemployment benefits), but the cyclically adjusted deficit would remain the same because it is adjusted to remove these cyclical effects.

Without a Change in Discretionary ﬁScal Policy, We Would Expect