Below is a table showing budget data for four hypothetical countries. Based on t

Question

Below is a table showing budget data for four hypothetical countries. Based on this information, calculate the cyclically adjusted budget (CAB) deficit or surplus as a percentage of GDP. Use a negative sign () to indicate deficits. Then use the CAB to determine whether each country is pursuing contractionary or expansionary fiscal policies Country Merka Furnland Ruritania Ilyria Actual government deficit (-)Cyclical component of the government or surplus (+) (% of GDP deficit (-) or surplus (+) (% of GDP) 2.7 3.2 2.3 2.8 -3.3 3.7 Merka's CAB Furnland's CAB Ruritania's CAB Ilyria's CAB Number Number Number Number O Expansionary O Contractionary O Expansionary O Contractionary O Expansionary O Contractionary O Expansionary O Contractionary

Explanation / Answer

The actual deficit/surplus is the sum of the cyclical deficit/surplus and structural deficit/surplus. The structural deficit/surplus is also known as cyclically adjusted deficit/surplus.

cyclically adjusted budget balance = actual budget balance - cyclical component of budget balance

A deficit normally indicates an expansionary fiscal policy and a surplus indicates a contractionary policy.

The solution is as follows

Merka's CAB = -2.7 - 3.2 = -5.7

Merka is pursuing an expansionary fiscal policy

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Furnland's CAB = 1.8 - (-2.3) = 4.1

Furnland is pursuing a contractionary fiscal policy

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Ruritania's CAB = 2.8 - 4.1 = -1.3

Ruritania is pursuing an expansionary fiscal policy

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Illyria's CAB = -3.3 - (-3.7) = 0.4

Illyria is pursuing acontractionary fiscal policy

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