Q1 Assume that the actual deficit is $200 billion, with the economy well below potential output. Once the level of economic activity rose to its potential level, tax revenues increased by $50 billion, and transfer payments fell by $20 billion. Then the structural deficit is ___________ billion and the cyclical deficit is _________________ billion Q2. Suppose that the required reserve ratio is 10%. An increase in the initial reserve of $10,000 can expand the money supply by $100,000. The value of deposit multiplier is then __________.
Q1 Assume that the actual deficit is $200 billion, with the economy well below potential output. Once the level of economic activity rose to its potential level, tax revenues increased by $50 billion, and transfer payments fell by $20 billion. Then the structural deficit is ___________ billion and the cyclical deficit is _________________ billion
Q2. Suppose that the
A cyclical deficit is the deficit which measures the fluctuation in tax and spending because of the economic cycle.
When economic activity rose, the tax is increased by the $50 billion and the transfer payment (spending) decreases by $20 billion.
Cyclical deficit = Change in spending – Change in tax
= (-20) – 50 = $80 billion
The structural deficit is a deficit which occurs when economy is at full employment which means the GDP is equal to potential GDP.
Structural deficit = Actual deficit – Cyclical deficit
= 200 – 80 = $120 billion
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