Final answer:
In a recession, the actual budget deficit falls below the standardized employment budget. This occurs because automatic stabilizers increase the deficit by lowering taxes and increasing government spending as the economy underperforms relative to its potential GDP. So, the correct answer is option b.
Step-by-step explanation:
During a recession, the actual budget deficit is typically higher than the standardized employment budget deficit. This scenario occurs because the economy is performing below its potential GDP, leading to the engagement of automatic stabilizers. These automatic stabilizers work by reducing taxes and increasing government spending to support the economy, which in turn increases the actual budget deficit.
If the economy was at full employment, the impact of these stabilizers would be lessened, resulting in a smaller budget deficit, hence the standardized employment budget figures can be seen as a version of the budget deficit that holds the economy constant at its potential GDP level of output.
When looking at historical data, such as the early 1990s, 2001, or 2009, the standardized employment deficit consistently measures smaller than the actual deficit during recessions. Conversely, in growth periods like the late 1990s, the standardized employment surplus can be lower than the actual budget surplus, showing the opposite effect of automatic stabilizers.
So, the correct answer is option b.