Suppose the economy is in a recessionary gap. If government expenditures are currently $1.4 trillion and tax revenues are currently $1 trillion,the (total)budget deficit is _____________. Assume that economists estimate that if the economy were operating at full employment
Government expenditures would be $1.2 trillion and tax revenues would be $1.1 trillion. The structural deficit is _________________ and the cyclical deficit is _______________.

Question

Quizplus · Accepted Answer

To determine the budget deficit, we subtract tax revenues from government expenditures:

$1.4 trillion - $1 trillion = $400 billion

To determine the structural and cyclical deficits, we need to compare the current budget to the budget that would exist if the economy were at full employment.

Structural Deficit: This is a measure of the budget deficit that would exist if the economy were operating at full employment. We can determine this by subtracting the estimated full employment tax revenues from the estimated full employment expenditures:

$1.2 trillion - $1.1 trillion = $100 billion

Cyclical Deficit: This is the portion of the current budget deficit that is due to the recessionary gap. We can determine this by subtracting the structural deficit from the current budget deficit:

$400 billion - $100 billion = $300 billion

Suppose the Economy Is in a Recessionary Gap