Suppose the government purposely changes the economy's cyclically-adjusted budget from a deficit of 3 percent of real GDP to a surplus of 1 percent of real GDP. The government is engaging in a(n)

Question

Multiple Choice
expansionary fiscal policy.
contractionary fiscal policy.
neutral fiscal policy.
high-interest-rate policy.

Answer 1

The government is engaging in a contractionary fiscal policy.

Contractionary fiscal policy involves reducing the budget deficit or moving to a budget surplus, which implies that the government is either decreasing its spending or increasing taxes. In this case, changing from a deficit of 3 percent of real GDP to a surplus of 1 percent of real GDP indicates a tightening of fiscal policy.