
Practical Management Science
6th Edition
ISBN: 9781337406659
Author: WINSTON, Wayne L.
Publisher: Cengage,
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Transcribed Image Text:**Problem Background: Fiscal Policy Analysis**
The table provides hypothetical budget data for an economy over six years. It involves analyzing whether the discretionary fiscal policy is contractionary (C), expansionary (E), or neither (N) by comparing actual and cyclically-adjusted budget deficits or surpluses.
**Table Structure:**
1. **Year** (Column 1): Lists the years from 1 to 6.
2. **Actual Budget Deficit (−) or Surplus (+)** (Column 2): Shows the actual budget position. A negative value indicates a deficit; a positive value indicates a surplus.
3. **Cyclically-adjusted Budget Deficit (−) or Surplus (+)** (Column 3): Reflects the budget position adjusted for cyclical factors, providing a clearer view of fiscal policy stance.
4. **Direction of Fiscal Policy** (Column 4): This is to be completed by determining whether the fiscal policy was contractionary (C), expansionary (E), or neither (N) based on the comparison of the actual and cyclically-adjusted figures.
**Data Analysis Required:**
- **Year 1**:
- Actual Deficit: −3.9%
- Cyclically-adjusted Deficit: −2.1%
- **Year 2**:
- Actual Deficit: −4.5%
- Cyclically-adjusted Deficit: −2.6%
- **Year 3**:
- Actual Deficit: −3.9%
- Cyclically-adjusted Deficit: −2.6%
- **Year 4**:
- Actual Deficit: −2.9%
- Cyclically-adjusted Deficit: −2.0%
- **Year 5**:
- Actual Deficit: −2.2%
- Cyclically-adjusted Deficit: −1.9%
- **Year 6**:
- Actual Deficit: −2.5%
- Cyclically-adjusted Deficit: −2.1%
**Instructions:**
- To determine the direction of fiscal policy, compare the actual deficit/surplus with the cyclically-adjusted deficit/surplus. Larger actual deficits compared to adjusted ones usually suggest expansionary policy, designed to stimulate the economy. Conversely, smaller actual deficits or surpluses compared to adjusted figures typically indicate contractionary policy, aimed to cool
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