Chapter 17 note

7 trillion deficit is 350 billion passive deficit

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Unformatted text preview: Passive Deficits • There is disagreement about what percentage of a deficit is structural and what percentage is passive • Actual deficit = structural deficit + passive deficit • Passive deficit = tax rate x (potential – actual output) • Structural deficit = actual deficit – passive deficit • Example: Potential Output is $6 Trillion Tax Rate = 25% Output is $5.7 Trillion Deficit is $350 Billion Passive Deficit = (Potential – Actual Output) x Tax Rate 300(5 5.7billon) x .25 = 75 Structural Deficit = Deficit – Passive Deficit 350 – 75 = 275 Nominal and Real Surpluses and Deficits • A nominal deficit is the difference between expenditures and receipts Including regular price • A real deficit is the nominal deficit adjusted for inflation • Inflation reduces the value of the debt • Real deficit = Nominal deficit – (Inflation x Total debt) • Lowering the real deficit by inflation can be costly Persistent inflation becomes built into expectations and causes higher interest rates...
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