Question

Because of automatic stabilizers, various components of the government's budget depend on the level of output, Y. The following are the main components of that budget:

Tax revenues 1,200 + 0.12Y
Transfers 600-0.06Y
Government purchases 1,900
Interest payments 150


Full-employment output is 10,000 .
Find the actual budget deficit and the full-employment budget deficit forY=12,000.
Actual budget deficit =_____
Full-employment budget deficit =____

Answer 1

The actual budget deficit when Y=12,000 is $10, and the full-employment budget deficit is $250. These calculations consider the government's budget components such as taxes, transfers, purchases, and interest payments at different output levels.

Step-by-step explanation:

To calculate both the actual budget deficit and the full-employment budget deficit, we must first find the government's budget components at the specified levels of output, Y.

For an output level of Y=12,000, we can compute the following:

• Tax revenues = 1,200 + 0.12(12,000) = $2,640
• Transfers = 600 - 0.06(12,000) = $600
• Government purchases = $1,900 (given as constant)
• Interest payments = $150 (given as constant)

To find the actual budget deficit, we subtract the total government expenditures from the tax revenues:

Actual budget deficit = Government purchases + Interest payments + Transfers - Tax revenues

Actual budget deficit = 1,900 + 150 + 600 - 2,640 = $10

For the full-employment budget deficit at Y=10,000:

• Tax revenues = 1,200 + 0.12(10,000) = $2,400
• Transfers = 600 - 0.06(10,000) = $600
• Government purchases = $1,900
• Interest payments = $150

Full-employment budget deficit = Government purchases + Interest payments + Transfers - Tax revenues

Full-employment budget deficit = 1,900 + 150 + 600 - 2,400 = $250

In conclusion, the actual budget deficit for Y=12,000 is $10, and the full-employment budget deficit is $250.