The cyclically adjusted deﬁcit as a percentage of GDP is 2 percent in Year 1. This cyclically adjusted deﬁcit becomes 1 percent of GDP in Year 2. It can be concluded that from Year 1 to Year 2,
A) ﬁscal policy was more expansionary.
B) ﬁscal policy was more contractionary.
C) the Federal government is decreasing taxes.
D) the Federal government is increasing spending.

Question

Quizplus · Accepted Answer

The cyclically adjusted deficit decreased from 2% to 1% of GDP, indicating that the government's fiscal policy was more contractionary in Year 2. This could be achieved through a decrease in government spending, an increase in taxes, or a combination of both. However, we cannot conclude whether the government is decreasing taxes or increasing spending based on this information alone.

The Cyclically Adjusted Deﬁcit as a Percentage of GDP Is