Question

If the actual budget deficit is $260 billion, the economy is operating $600 billion above its potential, and the marginal tax rate is 17 percent, what are the structural deficit or surplus and the cyclical deficit or surplus?

Answer 1

• structural deficit = $362 billion
• cyclical surplus = $102 billion

Step-by-step explanation:

In order to calculate the structural deficit we have to solve the following equation:

structural deficit = actual deficit + (economy's operating level above potential x marginal tax rate) = $260 billion + ($600 billion x 17%) = $260 billion + $102 billion = $362 billion

The cyclical surplus is calculated by multiplying the economy's operating level above potential times marginal tax rate = $600 billion x 17% = $102 billion