The diagram below shows two budget deficit functions for a hypothetical economy. FIGURE 31-2 Refer to Figure 31-2.Initially,suppose the economy is at point A on budget deficit function .Real GDP (Y)is $100 million.If the level of potential output (Y*)were $300 million,how much of the actual budget deficit is due to the underlying structure of fiscal policy and is therefore independent of the current level of GDP?

Question

The diagram below shows two budget deficit functions for a hypothetical economy.  FIGURE 31-2 Refer to Figure 31-2.Initially,suppose the economy is at point A on budget deficit function  .Real GDP (Y)is $100 million.If the level of potential output (Y*)were $300 million,how much of the actual budget deficit is due to the underlying structure of fiscal policy and is therefore independent of the current level of GDP?

Quizplus · Accepted Answer

To find the answer, we need to look for the vertical distance between points A and B on the vertical axis (budget deficit) for the given level of real GDP ($100 million). This distance represents the part of the budget deficit that is independent of the current level of GDP and reflects the underlying structure of fiscal policy. 
At point A, the budget deficit is $7.5 million. At point B, the budget deficit is $14 million. The vertical distance (independent of GDP) between A and B is $14 million - $7.5 million = $6.5 million. Therefore, the answer is choice C, $7.5 million.

The Diagram Below Shows Two Budget Deficit Functions for a Hypothetical