The government has just issued a news bulletin announcing that it is currently running a budget deficit of $100 billion.Two economists are arguing (imagine!)over this announcement.One economist claims that the deficit is larger than the government is reporting,while the other maintains that the government is actually running a budget surplus.Here are the facts: the size of the economy is $7 trillion,potential output is $7.5 trillion,and the marginal tax rate is 25%.Government expenditures do not vary with income.It turns out that both economists are correct! How can this be? Hint: Consider the difference between the passive and the structural deficit concepts.

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The Answer of The government has just issued a news bulletin announcing that it is currently running a budget deficit of $100 billion.Two economists are arguing (imagine!)over this announcement.One economist claims that the deficit is larger than the government is reporting,while the other maintains that the government is actually running a budget surplus.Here are the facts: the size of the economy is $7 trillion,potential output is $7.5 trillion,and the marginal tax rate is 25%.Government expenditures do not vary with income.It turns out that both economists are correct! How can this be? Hint: Consider the difference between the passive and the structural deficit concepts.

The Government Has Just Issued a News Bulletin Announcing That