Question

If the actual budget deficit is $160 billion, the economy is operating $350 billion above its potential, and the marginal tax rate is 12 percent, what are the structural deficit or surplus and the cyclical deficit or surplus?

Instructions: Enter your answers as whole numbers.a.The structural (deficit or surplus) is $_____ billion.

b.The cyclical (deficit or surplus) is $_____ billion.

Answer 1

(a) $202 billion

(b) -$42 billion

Step-by-step explanation:

Given that,

Actual budget deficit = $160 billion

Marginal tax rate = 12 percent

Economy operates = $350 billion above its potential

(b) Cyclical deficit = Tax rate × (Potential output - Actual output)

= 0.12 × (-$350)

= -$42 billion

Note: We have taken negative $350 because actual output is $350 above the potential level of output.

(a)

Actual deficit = structural deficit + cyclical deficit

$160 = structural deficit + (-$42)

structural deficit = $160 + $42

= $202 billion