If the cyclically adjusted deficit rises from 1% of GDP to 3% of GDP, what is the status of the discretionary fiscal policy?

Question

Multiple choice question.

Expansionary

Not enough information

Neutral

Contractionary

Answer 1

The correct answer is Expansionary.

When the cyclically adjusted deficit rises, it indicates that the government is spending more than it is receiving in revenue, independent of the effects of the economic cycle. A rise from 1% of GDP to 3% of GDP suggests that the government is increasing its deficit spending, which is typically associated with expansionary fiscal policy. This means the government is likely trying to stimulate economic activity through increased spending or tax cuts.