Question

If the actual budget deficit is $120 billion, the economy is operating $200 billion above its potential, and the marginal tax rate is 10 percent, what are the structural deficit or surplus and the cyclical deficit or surplus?

The structural _____ is $________.

The cyclical ______ is $________.

Answer 1

Economy is operating 200 billion dollar above its full employment level. The marginal tax rate is 10% which means 10% of the exess GDP of 200 billion is 20 billion dollar. This would be the cyclical surplus because the economy is able to generate tax revenue of 20 billion dollar above its full employment GDP.

Budget deficit is the difference between expenditure and revenue of the government. Structural deficit is the deficit that the government runs when the economy is at its full employment level.

Actual budget deficit is 120 billion. In order for the economy to reach its potential level, it must have an additional deficit of 20 billion. Therefore a structural budget deficit is 140 billion

Structural deficit is 140 billion

Cyclical surplus is 20 billion.