Question

Say the marginal tax rate is 30 percent and that government expenditures do not change with output. Say also that the economy is at potential output and that the deficit is $500 billion. a. What is the size of the cyclical deficit

Answer 1

Answer: $0

Explanation:

The cyclical deficit occurs when there is a different between the actual output and the potential output. This is why it is calculated by the formula:

= Tax rate * ( Potential output - Actual output)

As the economy here is at the potential output, it means that both the actual and the potential output are the same. In such a case, there would be no cyclical deficit.

This can be proven by the formula:

= Tax rate * ( Potential output - Actual output)

= 30% * (0)

= $0