1.. Calculate the structural and cyclical deficits from the information below. A

Question

1.. Calculate the structural and cyclical deficits from the information below. Assume potential output is $10 trillion, the tax rate is 0.20, and government spending does not change with income.

Output

Deficit

Cyclical Deficit

Structural Deficit

$9.8 trillion

$300 billion

________________

_________________

$9.6 trillion

$300 billion

________________

_________________

$10.2 trillion

$10.2 trillion

-0.04trillion_______________

_____10.24trillion____________

a.   What happens to the cyclical deficit as output gets closer to potential?

b.   What happens to the cyclical deficit when output is greater than potential?

Output

Deficit

Cyclical Deficit

Structural Deficit

$9.8 trillion

$300 billion

________________

_________________

$9.6 trillion

$300 billion

________________

_________________

$10.2 trillion

$10.2 trillion

-0.04trillion_______________

_____10.24trillion____________

Explanation / Answer

Ans a - The cyclical deficit decrease as the output gets closer to the potential.

Ans b - The cyclical deficit becomes negative when output is greater than potential.

Ans 1 -

Output Deficit Cyclical Strutural 9.8 300 0.04 0.26 9.6 300 0.08 0.22

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