The cyclically adjusted surplus in the U.S. went from +1.2 percent of GDP in 2000 to −1.2 percent of GDP in 2002. This suggests that the government during that period
A) cut taxes and/or increased spending.
B) increased taxes and/or cut spending.
C) wanted to rein in inﬂation.
D) did not change its discretionary ﬁscal policy.

Question

Quizplus · Accepted Answer

The cyclically adjusted surplus is a measure of the government's fiscal policy stance adjusted for the ups and downs of the business cycle. A positive surplus indicates a contractionary fiscal policy stance (i.e. reducing demand) while a negative surplus suggests an expansionary fiscal policy stance (i.e. increasing demand). Therefore, the fact that the cyclically adjusted surplus went from positive to negative during the period in question suggests that the government either cut taxes, increased spending, or both, which would have increased demand and led to a larger budget deficit. Choice A best fits this scenario.

The Cyclically Adjusted Surplus in the U