This assignment requires your knowledge of how economic activity affects the federal budget. Relevant knowledge is important because it is important to understand that the federal budget deficit affects all aspects of the economy, but also the state of the economy affects the federal budget.

Suppose that the federal budget is balanced when GDP is at potential GDP. If equilibrium GDP falls below potential, please explain how and why government transfer payments would change; how and why tax receipts would change; how and why the budget would change.