If an economy is $100 billion below potential, the tax rate is 20 percent, and the deficit is $180 billion, the structural deficit is:

Question

Quizplus · Accepted Answer

The structural deficit is the deficit that exists when the economy is at its potential output. In this case, the economy is $100 billion below potential, which means that if the economy were at potential, tax revenues would be higher (since the tax rate is 20%, an additional $100 billion in output would generate $20 billion in taxes). Therefore, if the current deficit is $180 billion, and we would have $20 billion more in taxes if at potential, the structural deficit is $180 billion - $20 billion = $160 billion.

If an Economy Is $100 Billion Below Potential, the Tax