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 actual budget deficit is:
A)$200 billion.
B)$20 billion.
C)$40 billion.
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 actual budget deficit is:
A)$200 billion. 
B)$20 billion. 
C)$40 billion. 
D)$60 billion.

Quizplus · Accepted Answer

The actual budget deficit is equal to the difference between government expenditures (G) and tax revenues (T) when the actual GDP is less than full-employment GDP.

Actual budget deficit = G - T

From the diagram, we can see that when actual GDP is $200 billion, government expenditures are $240 billion and tax revenues are $200 billion.

Therefore, actual budget deficit = $240 billion - $200 billion = $40 billion.

Hence, the correct answer is choice (C).

Refer to the Above Diagram Where T Is Tax Revenues