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Homework answers / question archive / 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

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

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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

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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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