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

Cyclical deficit is the difference between actual and full-employment GDPs multiplied by the marginal tax rate (MTR). 
Cyclical Deficit = (Y(FE) - Y(A)) x MTR
Where:
Y(FE) = Full Employment GDP = $400 billion
Y(A) = Actual GDP = $200 billion
MTR = (T - TR) / Y(A) = (40 - 10) / 200 = 0.15
T = Tax Revenues = $40 billion
TR = Transfer Payments = $10 billion

Cyclical Deficit = (400 - 200) x 0.15 = $30 billion
Therefore, the closest answer is B) $20 billion.

Refer to the Above Diagram Where T Is Tax Revenues