Question

suppose the government purposely changes the economy's cyclically adjusted budget from a deficit of 3 percent of real gdp to a surplus of 1 percent of real gdp. the government is engaging in a(n)

Answer 1

The government is engaging in contractionary fiscal policy by changing the cyclically adjusted budget from a deficit to a surplus, aiming to stabilize the economy and control inflation.

Step-by-step explanation:

When the government deliberately changes the economy's cyclically adjusted budget from a deficit to a surplus, it is engaging in contractionary fiscal policy.

Contractionary fiscal policy is typically implemented when the economy is perceived to be growing too quickly, which could lead to inflation. By moving from a deficit of 3 percent of real GDP to a surplus of 1 percent, the government is reducing its spending or increasing taxes to slow down the economy.

This decision can be controversial as it involves reductions in government spending or increases in taxes, which can affect different sectors of the economy in varying ways.

This type of policy can be part of a countercyclical fiscal strategy, aimed at stabilizing the economy over business cycles by reducing activity during boom periods and stimulating it during recessions. However, the impact of such policies can take time to materialize and the precise effects are not always easy to predict.