3. a) Why is the cyclically adjusted budget balance (CABB) a useful concept? b) Use a diagram to show how a ‘contractionary’ fiscal stance can appear to be ‘expansionary’ at

3. a) Why is the cyclically adjusted budget balance (CABB) a useful concept? b) Use a diagram to show how a ‘contractionary’ fiscal stance can appear to be ‘expansionary’ at a different point in the economic cycle. c) Show how your analysis in parts (a) and (b) can be applied to UK fiscal policy between (approximately) 2002 and 2007, i.e. pre-financial crisis? Contractionary
fiscal stance
B
B
+
Budget surplus
FPA
Bo
I FP
X
Fiscal policy
C+
Expansionary
looks

fiscal stance
– –
reasonable

here but the
Budget Deficit
Co
deficit is not
large enough
C
0
Downturn
Boom
Output gap

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