CFA Level I · CFA Level I Exam · Fiscal Policy
Which of the following statements best describes a structural budget deficit?
A structural deficit is one that persists even when the economy is at full employment output. It reflects the underlying gap between spending and tax revenue after removing cyclical effects. A deficit arising from lower revenue in a downturn is cyclical, not structural.
- AA deficit that remains even when the economy is at full employment outputCorrect
- BA deficit caused only by one-time emergency spending in a recession
- CA deficit caused by lower tax revenue during the downturn of a business cycle
Explanation
The structural deficit is the part of the deficit that would exist at potential output, after stripping out cyclical effects. The part caused by weak tax revenue in a downturn is the cyclical deficit. One-time emergency items do not define a structural deficit.
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