Author Question: Under what conditions will the official measure of the budget deficit be greater than, less than, or ... (Read 121 times)

JGIBBSON · **on:** Jun 30, 2018

Under what conditions will the official measure of the budget deficit be greater than, less than, or equal to the correct measure of the budget deficit.

What will be an ideal response?

Question 2

Which of the following would decrease the cyclically adjusted deficit?

A) an increase in income
B) a decrease in income
C) an increase in the primary deficit
D) a decrease in the primary deficit
E) none of the above

DHRUVSHAH · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

The official measure of the deficit is: iB + G - T.
The correct measure of the deficit is: rB + G - T.

The difference between the two measures equals B; that is, the official measure overstates the correct measure by that amount. The official measure will be greater when inflation is positive. The two measures will be equal when inflation is zero. And finally, the correct measure will be greater when inflation is negative.

Answer to Question 2

C