Question

The cyclical deficit:________ A. is not affected by changes in actual income or potential income. B. rises as the economy expands and falls as the economy contracts. C. is the deficit that exists if the economy is at potential income. D. rises as the economy moves below potential output.

Answer 1

B. rises as economy expands, falls as economy contracts.

Step-by-step explanation:

Deficit is the excess of government expenditures over government revenues.

Cyclical Deficit is interconnected to the Business Cycle phases of : Expansion, Peak, Recession, Depression, Trough, Recovery.

During growth stages of Business Cycle: Expansion or Recovery - this deficit falls because; there is more economic/ business activity & so more taxes receipts for govt & less govt expenditure on social support transfer payments (eg subsidies) to support public.

During declining stages: Recession or Depression - this deficit rises because; there is less economic/ business activity & so less taxes receipts for govt & more govt expenditure on social support transfer payments (eg subsidies) to support public.