Under what conditions will the official measure of the budget deficit be greater than, less than, or equal to the correct measure of the budget deficit.

What will be an ideal response?

ANSWER:

The official measure of the deficit is: iB + G – T.
The correct measure of the deficit is: rB + G – T.

The difference between the two measures equals πB; that is, the official measure overstates the correct measure by that amount. The official measure will be greater when inflation is positive. The two measures will be equal when inflation is zero. And finally, the correct measure will be greater when inflation is negative.