The cyclically adjusted budget deficit is the budget deficit corrected for the e

Question

The cyclically adjusted budget deficit is the budget deficit corrected for the effects of the business cycle. In other words, it is the budget deficit that the government would be running if unemployment were at the natural rate. (It is also called the full-emplyment budget deficit.) Some economists have proposed the rule that the cyclically adjusted budget deficit always be balanced. Compare this proposal to a strict balanced-budget rule. Which is the preferable? What problem do you see with the rule requiring a balanced cyclically adjusted budget?

Explanation / Answer

Generally it is said that govt should follow the strict balanced budget rule when it comes to the spendings by the govt. spending by the govt sometimes overshoot its income. Hence it results into the deficit. Deficit may turn into the debt problem which further may lead to the fall in economic system.

But balanced budget can not be observed always. During the recesison, it becomes imperative on the part of govt to spend more since there is excessive capacity in the economic system of country. Hence if govt spends more it will automatically increases the aggregate demand and overall output level hikes. It helps in dealing with problem of employment. Thus it has become clear that during the cyclical period, govt must not follow the strict rule of balanced budget instead it can make economy stable by assuming the policy of deficit budget.

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