Question

Say the marginal tax rate is 30 percent and that government expenditures do not change with output. Say also that the economy is at potential output and that the deficit is $$\$ 200$$ billion. a. What is the size of the passive deficit? b. What is the size of the structural deficit? c. How would your answers to $a$ and $b$ change if the deficit were still $$\$ 200$$ billion but the output were $$\$ 200$$ billion below potential? d. How would your answers to $a$ and $b$ change if the deficit were still $$\$ 200$$ billion but output were $$\$ 100$$ billion above potential? e. Which is likely of more concern to policy makers: a passive or a structural deficit? LO2

    Say the marginal tax rate is 30 percent and that government expenditures do not change with output. Say also that the economy is at potential output and that the deficit is $$\$ 200$$ billion.
a. What is the size of the passive deficit?
b. What is the size of the structural deficit?
c. How would your answers to $a$ and $b$ change if the deficit were still $$\$ 200$$ billion but the output were $$\$ 200$$ billion below potential?
d. How would your answers to $a$ and $b$ change if the deficit were still $$\$ 200$$ billion but output were $$\$ 100$$ billion above potential?
e. Which is likely of more concern to policy makers: a passive or a structural deficit? LO2

Macroeconomics

David Colander 8th Edition

Chapter 17, Problem 7

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Step 1

- **Marginal tax rate**: The tax rate applied to the last dollar of income. - **Government expenditures**: Total spending by the government, assumed constant in this scenario. - **Potential output**: The level of output (GDP) where the economy is operating at full Show more…

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Say the marginal tax rate is 30 percent and that government expenditures do not change with output. Say also that the economy is at potential output and that the deficit is $$\$ 200$$ billion. a. What is the size of the passive deficit? b. What is the size of the structural deficit? c. How would your answers to $a$ and $b$ change if the deficit were still $$\$ 200$$ billion but the output were $$\$ 200$$ billion below potential? d. How would your answers to $a$ and $b$ change if the deficit were still $$\$ 200$$ billion but output were $$\$ 100$$ billion above potential? e. Which is likely of more concern to policy makers: a passive or a structural deficit? LO2

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