Refer to the above diagram where T is tax revenues and G is government expenditures.All figures are in billions of dollars.If the full-employment GDP is $400 billion while the actual GDP is $200 billion, the cyclical deficit is:
A)$40 billion.
B)$20 billion.
C)zero.
D)$60 billion.

Question

Refer to the above diagram where T is tax revenues and G is government expenditures.All figures are in billions of dollars.If the full-employment GDP is $400 billion while the actual GDP is $200 billion, the cyclical deficit is:
A)$40 billion. 
B)$20 billion. 
C)zero. 
D)$60 billion.

Quizplus · Accepted Answer

The cyclical deficit equals the difference between actual GDP and full-employment GDP multiplied by the marginal propensity to save. In this case, the gap between actual and full-employment GDP is $200 billion, and assuming a marginal propensity to save of 0.1 (not given in the diagram), the cyclical deficit would be $20 billion (0.1 x $200 billion).

Refer to the Above Diagram Where T Is Tax Revenues