If the federal budget has an actual budget deficit of $100 billion and a cyclically adjusted budget deficit of $75 billion, then the economy: a

Business Dec 23, 2020

If the federal budget has an actual budget deficit of $100 billion and a cyclically adjusted budget deficit of $75 billion, then the economy:

a. could be below or above potential real GDP

b. must be below potential real GDP

c. must be at potential real GDP

d. must be above potential real GDP

Expert Solution

The answer is b).

In a recession, cyclically adjusted deficit is lower than actual budget deficit because government revenue tends to fall and spending tends to increase during a recession. In this question, the actual deficit is higher than the cyclically adjusted deficit, so the economy is in a recession, i.e., currently producing below potential real GDP.

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