If the cyclically adjusted deficit is reduced and turned into a cyclically adjusted surplus, what is the status of discretionary fiscal policy?

Question

Multiple choice question.

Expansionary

Neutral

Contractionary

Not enough information

Answer 1

If the cyclically adjusted deficit is reduced and turned into a cyclically adjusted surplus, the status of discretionary fiscal policy would be considered contractionary.

This is because reducing a deficit and moving to a surplus generally indicates that the government is either increasing taxes, reducing spending, or both, which typically constrains economic activity rather than stimulates it. Therefore, the correct answer is:

Contractionary.