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

Quizplus · Accepted Answer

At point A, the budget deficit is $6 million when the actual GDP is $100 million. If the economy were operating at its potential output ($300 million), the equilibrium point would shift upward to point B on the budget deficit function. From point B, a vertical line can be drawn down to the x-axis to find the structural deficit at potential output. This intersection occurs at a budget deficit of $13.5 million (as seen on the vertical dashed line). This $13.5 million includes the cyclical deficit at point A ($6 million) plus the structural deficit at potential output. To isolate the structural deficit, we can subtract the cyclical deficit from the total deficit at potential output:

Structural deficit = $13.5 million - $6 million
Structural deficit = $7.5 million

Therefore, the structural budget deficit at potential output would be $7.5 million.

The Diagram Below Shows Two Budget Deficit Functions for a Hypothetical