Suppose that the federal budget is balanced when GDP is at potential GDP.If equilibrium GDP falls below potential
A)this will result in a current budget deficit.
B)the cyclically adjusted budget will be balanced.
C)government transfer payments will be rising and tax receipts will be falling.
D)All of the above are correct.

Question

Quizplus · Accepted Answer

When equilibrium GDP falls below potential GDP, automatic stabilizers like government transfer payments increase and tax receipts decrease due to lower incomes, leading to a current budget deficit. However, the cyclically adjusted budget, which is calculated assuming the economy is at potential GDP, would still be balanced, as it abstracts from cyclical fluctuations. Thus, all the given statements are correct.

Suppose That the Federal Budget Is Balanced When GDP Is