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,how much of the actual budget deficit is due to the underlying structure of fiscal policy and is therefore independent of the current level of GDP?

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,how much of the actual budget deficit is due to the underlying structure of fiscal policy and is therefore independent of the current level of GDP?

Quizplus · Accepted Answer

The amount of the actual budget deficit that is independent of the current level of GDP is equal to the vertical intercept or the distance between the two deficit functions at Y = 0.

From the graph, we can see that this distance is $7.5 million. Therefore, the correct answer is (C) $7.5 million.

The Diagram Below Shows Two Budget Deficit Functions for a Hypothetical