2. a. Complete the table below by stating whether the direction of discretionary

Question

2. a. Complete the table below by stating whether the direction of discretionary fiscal policy was contractionary (C), expansionary (E), or neither (N), given the hypothetical budget data for an economy. Actual budget deficit (-) or Cyclically adjusted budget deficit (-) or Direction of -ear--surplus (t) surplust+)--fiscal policy- $170 billion 2120 billion -$130 billion -90 billion +40 billion20 billion -50 billion - 100 billion 1 2 4 60 billion 5 120 billion b. The best gauge of the direction of fiscal policy is the (actual, cyclically adjusted) budget deficit or surplus because it removes the (cyclical, actual) component from the discussion of the budget situation c. (1) In what years were there cyclical deficits, and what was the amount of the cyclical deficit in each of those years? (2) In what year was the actual budget surplus greater than the cyclically adjusted budge surplus, and by what amount greater?

Explanation / Answer

2. a. Year 1. Discretion of Fiscal Policy overall impact is Expansionary (Maintaining Full Employment)

Year 2. Expansionary

Year 3. Contractionary

Year 4. Expansionary

Year 5. Expansionary

b. The best gauge... cyclically adjusted budget deficit..... because it removes the cyclical component..

In layman's language ( Actual - Cyclical= cyclically adjusted)

c. (1) In every year there were cyclical deficit except year 3.

The amount of deficit in each year is as follows:-

Year 1. -40 billion (actual minus cyclically adjusted)

Year 2. -30 billion

Year 3. No deficit

Year 4. -10 billion

Year 5. -20 billion

c. (2) Only in Year 3, the actual budget is greater than cyclically adjusted budget by 20 million.

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