If the actual budget deficit is $160 billion, the economy is operating $350 billion above its potential, and the marginal tax rate is 12 percent, what are the structural deficit or surplus and the cyclical deficit or surplus?

instructions: enter your answers as whole numbers. a.the structural (deficit or surplus) is $ billion.

b. the cyclical (deficit or surplus) is $ billion.

(a) $202 billion

(b) -$42 billion

Explanation:

Given that,

Actual budget deficit = $160 billion

Marginal tax rate = 12 percent

Economy operates = $350 billion above its potential

(b) Cyclical deficit = Tax rate × (Potential output - Actual output)

                              = 0.12 × (-$350)

                              = -$42 billion

Note: We have taken negative $350 because actual output is $350 above the potential level of output.

(a)

Actual deficit = structural deficit + cyclical deficit

$160 = structural deficit + (-$42)

structural deficit = $160 + $42

                           = $202 billion

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