Th4.5: Distinction Between Structural and Cyclical Deficits

Question 1

What is a cyclical deficit?

Answer 1

the part of the deficit that occurs because government spending and tax fluctuates around the trade cycle

Question 2

When the economy is in a recession…

Answer 2

tax revenues are low and spending is high creating a larger deficit

Question 3

At the peak of the boom there is no…

Answer 3

cyclical deficit - any deficit at this point is a structural deficit

Question 4

What is the structural deficit?

Answer 4

the fiscal deficit which occurs when the cyclical deficit is zero - it is long term and not related to the state of the economy

Question 5

What is the actual deficit?

Answer 5

the structural deficit plus the fiscal deficit

Question 6

When does a structural surplus occur?

Answer 6

when at the peak of the boom there is an actual fiscal surplus

Question 7

When does a structural balance occur?

Answer 7

when at the peak of the boom, the actual fiscal balance is 0

Question 8

If the government has a structural deficit, it is likely that…

Answer 8

the national debt will grow over time as the government has to consistently borrow money to finance spending

Question 9

For this reason, it is argued that structural deficits need to be eliminated - why is this difficult?

Answer 9

it is impossible to know what part of the deficit is structural and what part of it is cyclical, just as it is impossible to know the size of the output gap