To determine the cyclically adjusted deficit or surplus in an economy, calculate the level of potential output and then use the deficit/surplus line to determine what the deficit or surplus would be at that level of output. In panel (a), the economy has a cyclically adjusted deficit, whereas in panel (b), it has a cyclically adjusted surplus. Figure 14.10 “Cyclical Deficit” and “Structural Deficit” show that there are two distinct reasons why a government might go from surplus into deficit—as happened in 2002, for example. Suppose that, last year, the economy was at potential output and there was a cyclically adjusted surplus (point A). Now imagine that this year there is a government deficit. One possibility is that the economy went into recession, as in “Cyclical Deficit”, point B. This is called a cyclical deficit because it is due to the state of the business cycle. Another is that the stance of fiscal policy has changed—for example, because of an increase in government spending, as in Figure 14.11 “Structural Deficit”, point C.
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The Cyclically Adjusted Budget Deficit
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