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If the economy is producing less than its potential GDP, the standardized employment budget will show a larger deficit than the actual budget.
Standardized employment budget :
The calculation of the standardised employment budget determines the budget deficit or surplus for a particular year if the economy had been producing at its potential GDP for that year.
For a variety of reasons, including worries regarding time lags, the effect on interest rates, and the intrinsically political nature of fiscal policy, many economists and politicians reject the use of this tool.
Under what circumstances would a standardized employment budget show a larger deficit than the actual budget?
If the economy is doing very well, the standardized employment deficit (or surplus) will be larger than the actual budget deficit (or surplus). This is because the economy is producing close to its potential GDP. As such, the automatic stabilization mechanism increases taxes and reduces the need for government spending.
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