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 B0.Real GDP (Y)is $100 million.If the level of potential output (Y*)were $300 million,the cyclical component of the actual budget deficit would be

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 B0.Real GDP (Y)is $100 million.If the level of potential output (Y*)were $300 million,the cyclical component of the actual budget deficit would be

Quizplus · Accepted Answer

At point A, the actual budget deficit is $6 million. The distance from point A to potential output (Y*-Y) is $200 million. The slope of the budget deficit function is -0.025. Therefore, the cyclical component of the actual budget deficit is (-0.025)($200 million) = $6.5 million.

The Diagram Below Shows Two Budget Deficit Functions for a Hypothetical