Q1. Real GDP 800 805 810 815 820 Surplus 0 2 4 6 8 The above table shows the rel
ID: 1102750 • Letter: Q
Question
Q1.
Real GDP 800 805 810 815 820
Surplus 0 2 4 6 8
The above table shows the relationship between the fiscal surplus and real GDP. Assume potential GDP is 805 and real GDP is currently 815. (Remember that a deficit is a negative surplus.) Provide sufficient working or explanations.
i) What is the size of the structural surplus? ______________ (1 marks)
ii) What is the size of the cyclical surplus? ______________ (2 marks)
iii) Explain whether the government is currently running an expansionary or contractionary fiscal policy.
Explanation / Answer
. Assume potential GDP is 805 and real GDP is currently 815. When the economy is at its full employment level actual GDP = potential GDP and so the surplus at that level is 2. This is the surplus that is unrelated to the business cycle. While the cyclical surplus when GDP is 815, amounts to 6 - 2 = 4.
Hence
) What is the size of the structural surplus? It is 2.
ii) What is the size of the cyclical surplus? 6 - 2 = 4.
iii) Explain whether the government is currently running an expansionary or contractionary fiscal policy.
Since the government has a surplus when GDP is 815, it is running a contractionary fiscal policy as revenues exceed spending.
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