Question

Refer to the accompanying table for Waxwania.

Government Expenditures, G	Tax Revenues, T	Real GDP
$190	90	$450
190	110	550
190	130	650
190	150	750
190	170	850

Suppose Waxwania is producing $550 of real GDP, whereas the potential real GDP (= full-employment real GDP) is $650.

a. How large is its budget deficit?

    $ _____ billion

b. Its cyclically adjusted budget deficit?

    $ _____ billion

c. Its cyclically adjusted budget deficit as a percentage of potential real GDP?

Instructions: Round your answer to two decimal places.

_____ percent

d. Is Waxwania’s fiscal policy expansionary or contractionary?

Expansionary or Contractionary

Answer 1

1. If Waxwania is producing $550 of real GDP, the budget deficit equals $80 (= $190 (government spending at $550) - $110 (government revenue at $550)).
2. If potential real GDP (= full-employment real GDP) is $650, then the cyclically adjusted budget deficit is $60 (= $190 (government spending at $650) - $130 (government revenue at $650)).
3. The cyclically adjusted budget deficit as a percentage of potential real GDP equals 9.23 percent (= $60/$650= 0.0923, or approximately 9.23 percent)
4. Since the government is running a cyclically adjusted budget deficit, this fiscal policy is expansionary.