Because of automatic stabilizers, various components of the government's budget depend on the level of output Y. The following are the main components of that budget:
Tax revenues................................ 1000 + 0.1Y
Transfers.................................... 800 - 0.05K
Government purchases.................... 1800
Interest payments........................... 100
Full-employment output is 10,000. Find the actual budget deficit and the full-employment budget deficit for
a. Y = 12,000.
b. Y = 10,000.
c. Y = 8000.
In general, how does the relationship between the actual deficit and the full-employment deficit depend on the state of the economy?