A cyclical budget deficit is mainly caused by:
Correct answer: A. A temporary fall in revenue during recession
- A. A temporary fall in revenue during recession
- B. A permanent rise in public debt interest
- C. A planned increase in defence expenditure
- D. A long term reduction in the tax rate
Explanation
A cyclical deficit arises from the position of the economy in the business cycle. During a recession, tax receipts usually fall and some public spending rises automatically, even without new policy decisions.
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About Public Finance
Government revenue and expenditure are analysed through taxation, public borrowing, budgets, subsidies, transfers and public debt. The topic explains how fiscal policy affects resource allocation, income distribution, economic stability and growth, while distinguishing direct from indirect taxes, progressive from regressive taxation, and public goods from goods supplied by private markets.
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