If the economy is producing less than its potential GDP, the standardized employment budget will show a larger deficit than the actual budget.
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If the economy is producing less than its potential GDP, _____________________ will show a larger deficit than the actual budget.
Select one:
a. discretionary fiscal policy
b. the standardized employment budget
c. the automatic stabilizers
d. expansionary fiscal policy
A standardized employment budget is a calculation of what the budget deficit or surplus would be in a year if the economy were generating potential GDP in that year.
When the economy is in recession, the normalized employment deficit is less than the actual deficit because the economy is below potential GDP and the automatic stabilizer cuts taxes to increase spending.
A common example of automatic stabilization is corporate and personal income taxes that are progressive ie set in proportion to the income level of the taxpayer. Other examples include transfer schemes such as insurance, welfare, and stimulus checks.
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