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?