First, define and explain the cyclically adjusted deficit. ...

[penza]

First, define and explain the cyclically adjusted deficit. Second, explain what effect a recession caused, for example, by a reduction in consumer confidence will have on the size of the cyclically adjusted deficit.
 
  What will be an ideal response?

Question 2

Explain what is meant by automatic stabilizers and how they work to minimize fluctuations in economic activity.
 
  What will be an ideal response?

[kkenney]

Answer to Question 1

The cyclically adjusted deficit is the deficit that would occur if the economy were operating at the natural level of output. In terms of notation, it would be represented as G - T0 - tYN where T0 is autonomous taxes, YN is the natural level of output, and t is the average income tax rate. Deviations in output from YN will not cause changes in the cyclically adjusted deficit. So, a consumption-led recession will have no effect on this particular measure of the budget.

Answer to Question 2

Automatic stabilizers refer to the effect that changes in economic activity have on the size of the actual deficit. The fact that T will automatically fall as Y falls, will dampen the effects of any negative shock on the economy.