Question

Last year, while an economy was in a recession, government spending was $595 billion and government revenue was $505 billion. Economists estimate that if the economy had been at its full-employment level of GDP last year, government spending would have been $555 billion and government revenue would have been $550 billion. Which of the following statements about this government’s fiscal situation are true? LO3 a. The government has a non–cyclically adjusted budget deficit of $595 billion. b. The government has a non–cyclically adjusted budget deficit of $90 billion. c. The government has a non–cyclically adjusted budget surplus of $90 billion. d. The government has a cyclically adjusted budget deficit of $555 billion. e. The government has a cyclically adjusted budget deficit of $5 billion. f.The government has a cyclically adjusted budget surplus of $5 billion

Answer 1

The correct answer is option b and option e.

Step-by-step explanation:

In recession, the government spending was $595 billion and government revenue was $505 billion.

In recession the budget was in deficit as the spending was greater than revenue.

Budget deficit

= $595 billion - $505 billion

= $90 billion

At full employment the government spending was $555 billion and the government revenue was $550 billion.

Budget deficit

= $555 billion - $550 billion

= $5 billion

So, the government has a non–cyclically adjusted budget deficit of $90 billion and a cyclically adjusted budget deficit of $5 billion.