Question

As a percentage of​ GDP, the federal budget deficit rose dramatically immediately after 2008 before returning to more normal levels about five years later. The main reason for the unusual increase is that the dollar magnitudes of federal government deficits were very large at that time. How might the fact that a significant economic contraction occurred at that time provide another explanation for why those percentages were so​ high? The federal​ deficit-to-GDP percentage is calculated by dividing ________ by _________ and multiplying by 100. a) Federal government deficits; GDP b) GDP; federal government deficits c) Federal government spending; federal government revenue d) Federal government revenue; federal government spending Since the dollar magnitudes of federal government deficits were very large immediately after​ 2008, the ________ was very large. a) Deficit-to-GDP percentage b) Federal budget surplus c) Federal budget deficit d) National debt During an economic​ contraction, real GDP falls below the​ long-run level consistent with LRAS curve.​ Consequently, the ________ ________, which also ________ the percentage somewhat. a) Federal budget surplus; decreases b) Deficit-to-GDP percentage; increases c) Federal budget deficit; decreases d) National debt; increases

Answer 1

1. The federal deficit-to-GDP percentage is calculated by dividing (a) Federal government deficits by (b) GDP and multiplying by 100.

2. Since the dollar magnitudes of federal government deficits were very large immediately after 2008, the (c) Federal budget deficit was very large.

3. During an economic contraction, real GDP falls below the long-run level consistent with LRAS curve. Consequently, the (b) Deficit-to-GDP percentage; increases, which also (c) Federal budget deficit; decreases the percentage somewhat.

Step-by-step explanation:

1. The federal deficit-to-GDP percentage is a crucial metric used to assess the fiscal health of a country. It is calculated by dividing (a) Federal government deficits by (b) GDP and then multiplying by 100 to express it as a percentage. This ratio reflects the relationship between the federal budget deficit and the size of the economy (GDP). When the numerator (federal government deficits) grows or the denominator (GDP) shrinks, the percentage rises, indicating a potentially larger burden of deficits on the economy.

2. In the aftermath of 2008, the dollar magnitudes of federal government deficits swelled considerably. This led to an increase in the (c) Federal budget deficit, emphasizing the financial strain and imbalance between government expenditures and revenues. The immense deficits relative to the GDP resulted in a higher deficit-to-GDP percentage, depicting the substantial weight of the deficit on the economy.

3. Economic contractions result in a decline in real GDP, falling below the long-run level as per the LRAS curve. This contractionary phase contributes to an increase in the (b) Deficit-to-GDP percentage as GDP decreases. Moreover, during these contractions, the (c) Federal budget deficit might decrease due to reduced government revenues and increased automatic stabilizer expenditures. This dual impact alters the deficit-to-GDP percentage, showcasing the relationship between economic downturns, deficit ratios, and government financial positions.