Below is some information about the state of the budget and the economy.
1.A budget deficit and a recessionary gap.
2.A budget deficit and an inflationary gap.
3.A budget surplus and a recessionary gap.
4.A budget surplus and an inflationary gap.
-Refer to the information above to answer this question.When would a balanced-budget fiscal policy be pro-cyclical?
A)1 only.
B)1 and 4.
C)2 only.
D)2 and 3.

Question

Quizplus · Accepted Answer

A balanced-budget fiscal policy is pro-cyclical when it exacerbates the economic cycle. In the case of a recessionary gap (1), increasing taxes or decreasing spending to balance the budget would worsen the recession, making it pro-cyclical. Similarly, in the case of an inflationary gap (4), reducing taxes or increasing spending to balance the budget would exacerbate inflation, also making it pro-cyclical.

Below Is Some Information About the State of the Budget