Question

Say the marginal tax rate is 20 percent and that government expenditures do not also that the economy is at potential output and that the deficit is $450 billion
a. What is the size of the cyclicel deficit? Instructions: Round your answer to the nearest whole dollar amount Leave no cell blank. You must enter "O" for the answer to grade correctly.
b. What is the size of the structural deficit? Instructions: Round your answer to the nearest whole dollar amount. Leave no cell blank. You must enter "0" for the answer to grade correctly billion
c. How would your answers to a and b change if the deficit was still $450 billion but output was $200 billion below potentiel? Instructions: Round your answers to the nearest whole dollar amount. Leave no cell blank. You must enter "O for the answer to grade correctly Cyclical deficit is $ Structural deficit is s billion
d. How would your answers to a and b change if the deficit was still $450 billion but output was $350 billion above potentiel? enter "O" far the answer to grade correctly billion billion Instructions: Round your answers to the nearest whole dolar amount Leave no cell blank You must Cyclicel surplus is Structural defict s s
e. Which is likely of more concern to policy makers a cyclical or a structurel defict Structural deficit because an economy can elminate it through growth in income Structural deficit because normal stabilization policies will not remove a structural defict Cydlical deficit because an economy cannot grow its way out of t It depends on the state of the economy relative to potential income

Answer 1

Solution and Explanation:

a) The deficit is structural deficit, not cyclical deficit

b) Structural deficit is $450 billion

Revenue less than outlays; the GDP = Potential GDP

cyclical - during a recession , Structural - normal times

This is the budget deficit at potential GDP

Structural deficit = Total Government deficit - Cyclical Deficit

Government expenditures do not change with output

c) the deficit is both structural and cyclical

200 billion below potential; at potential output it will be 200 billion higher

Cyclical deficit = $200 billion

Structural = 450 - 200 = 250

d) Cyclical surplus = $350 billion

Structural deficit = $100 billion

e) Structural as normal stabilization policies will not remove a structural deficit