Final answer:
A balanced-budget fiscal policy is pro-cyclical when it exacerbates economic fluctuations; this occurs in scenario 1 (a recessionary gap with a budget deficit) and scenario 4 (an inflationary gap with a budget surplus). The correct option indicating when a balanced-budget policy would be pro-cyclical is b. 1 and 4.
Step-by-step explanation:
When considering the question of when a balanced-budget fiscal policy might be pro-cyclical, it relates to the instances where such a policy amplifies the fluctuations in the economic cycle rather than smoothening them out. A balanced-budget policy can be pro-cyclical in scenarios where the government insists on a balanced budget regardless of the economic context.
For instance, in the case of a recessionary gap, a balanced-budget policy would involve raising taxes or cutting spending to balance the budget, potentially deepening the recession.
Conversely, in an inflationary gap, maintaining a balanced budget might entail injecting additional funds into the economy, which could further fuel inflation.
According to the information provided, a balanced-budget policy would be pro-cyclical in scenarios 1 and 4:
- Scenario 1: A budget deficit and a recessionary gap. During a recession, policy should be expansionary, but a balanced-budget approach would require cutbacks or increased taxes, worsening the recession.
- Scenario 4: A budget surplus and an inflationary gap. Here, a balanced budget could mean spending the surplus, exacerbating inflation.
Therefore, the correct option that indicates when a balanced-budget policy would be pro-cyclical is b. 1 and 4.