Say the marginal tax rate is 30 percent and that government expenditures do not

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 $200 billion.
   
a. What is the size of the cyclical 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.

    $.
  
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 $200 billion but output was $200 billion below potential?

    Instructions: Round your answers to the nearest whole dollar amount. Leave no cell blank. You must enter "0" for the answer to grade correctly.
  
    Cyclical deficit is $ billion.
  
    Structural deficit is $ billion.
   
d. How would your answers to a and b change if the deficit was still $200 billion but output was $100 billion above potential?

    Instructions: Round your answers to the nearest whole dollar amount. Leave no cell blank. You must enter "0" for the answer to grade correctly.

    Cyclical surplus is $ billion.
   
    Structural deficit is $ billion.
   
e. Which is likely of more concern to policy makers: a cyclical or a structural deficit?
  

It depends on the state of the economy relative to potential income. Cyclical deficit because an economy cannot grow its way out of it. Structural deficit because normal stabilization policies will not remove a structural deficit. Structural deficit because an economy can eliminate it through growth in income.

Explanation / Answer

(a) Cyclical deficit is zero (as it is zero at potential output)

(b) Actual deficit = Structural deficit + Cyclical deficit

200 = Structural deficit + 0

Structural deficit = 200

(e) Structural and cyclical deficits are two components of deficit spending. These terms are especially applied topublic sector spending which contributes to the budget balance of the overall economy of a country.

"Structural deficit because normal stabilization policies will not remove a structural deficit"

The cyclical deficit is the deficit experienced at the low point of this cycle when there are lower levels of business activity and higher levels of unemployment.

A structural (permanent) deficit differs from a cyclical deficit in that it exists regardless of the point in the business cycle due to an underlying imbalance in government revenues and expenditures. Thus, even at the high point of the business cycle when revenues are high the country's economy may still be in deficit.[2]

It depends on the state of the economy relative to potential income.

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