Answer:
Waxwania’s fiscal policy is expansionary
Explanation:
If Waxwania is producing $600 of real GDP, the budget deficit will be $40 billion ($160 (government spending at $600) – $120 (government revenue at $600)).
If potential real GDP (full employment real GDP) is $700, then the cyclically adjusted budget deficit is $20 billion (=$160 (government spending at $700) – $140 (government revenue at $700)).
Thus, the cyclically adjusted budget deficit as a percentage of potential real GDP equals 2.86 percent ($20/$700 = 0.02857 or approximately 2.86 percent).
Since the government is running a cyclically adjusted budget deficit, this fiscal policy is expansionary.
Fiscal policy is the process through which a country modifies its spending and tax rates in order to track and affect the economy of a country. A central bank influences a country's monetary base through this method, which is similar to monetary policy.
The correct answer for Waxwania’s fiscal policy is expansionary
The budget shortfall will be $40 billion ($160 (government spending at $600) - $120 (federal earnings at $600) if Waxwania produces $600 of real GDP.
The cyclically adjusted budget deficit is $20 billion (=$160 (government spending at $700) – $140 (federal earnings at $700) if potential real GDP (full-employment real GDP) is $700.
In a conclusion, the rapid ratio deficit as a percentage of potential real GDP is 2.86 percent ([tex]\frac{\$20}{\$700}[/tex] = 0.02857, or 2.86 percent).
This fiscal strategy is expansionary since the nation has a cyclically adjusted budget deficit.
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