Question

1) Simply and briefly define the following:

a. cyclical deficit:

b. structural deficit:

c. contractionary fiscal policy:

d. laffer curve:

Answer 1

a) cyclical deficit: The part of the budget deficit which increases in the downswing of the economic cycle ( recession)  and decreases in the upswing of the cycle ( economic boom).

Cyclical deficit = tax rate * (potential output - actual output)

b) structural deficit: The part of the budget deficit which is unaffected by the economic cycle but occurs due to structural change in the economy affecting the government's finances.

Structural Deficit= Actual deficit - cyclical deficit

c) contractionary fiscal policy - contractionary fiscal policy includes decrease government expenditures or increase taxes to decrease aggregate demand or supply.

d) Laffer curve - Laffer curve Plots Tax revenue against Tax rates (%). It illustrates the concept of taxable income elasticity meaning taxable income changes in response to changes in the rate of taxation

answered by: anonymous