Cyclical Unemployment Increases Budget Deficits

Steps:

• Identify budget changes: rising deficits from higher expenditure and/or lower revenue.
• Link to economic cycle: deficits widen during downturns via automatic stabilizers.
• Connect to unemployment: cyclical type rises in recessions, boosting welfare spending.
• Confirm impact: reduced economic activity lowers tax receipts, explaining deficit growth.

Why C is correct:

• Cyclical unemployment rises during economic downturns, increasing automatic stabilizer spending on benefits while lowering tax revenues from reduced incomes and output (per Okun's law linking unemployment to GDP gaps).

Why the others are wrong:

• A: A fall in dependency ratio expands the working-age population, raising tax revenues and improving the budget.
• B: A fall in cyclical unemployment signals economic recovery, reducing welfare costs and boosting revenues.
• D: An increase in real GDP drives higher tax collections and lower relative spending needs, narrowing deficits.

Final answer: C