Explain in words why the structural budget might show a surplus while the actual budget is in deficit. Illustrate your answer with a diagram like Figure 6 .

First, understand the difference between a structural budget and an actual budget. A structural budget refers to the budget balance that would occur if the economy was at its potential level of output, while an actual budget is the government's budget balance in the current economic conditions (which might not be at its potential level). A structural budget surplus occurs when government revenues are greater than government expenditures at the potential output level, while a structural budget deficit occurs when government expenditures are greater than government revenues at the potential output level. An actual budget surplus occurs when government revenues are greater than government expenditures in the current economic conditions, and an actual budget deficit occurs when government expenditures are greater than government revenues in the current economic conditions.

Now, let's explain why a structural budget might show a surplus while the actual budget is in deficit. The difference between the structural budget and the actual budget mainly arises due to economic fluctuations, that is, when the actual output level does not reach the potential output level. During an economic downturn, actual output falls below the potential output, resulting in lower tax revenues and higher government expenditures on social programs (unemployment benefits, for example). As a result, the actual budget might show a deficit even though the structural budget shows a surplus. Conversely, during an economic boom, actual output rises above the potential output, leading to higher tax revenues and lower government expenditures, which might create an actual budget surplus even if the structural budget is in deficit.

To illustrate this concept, let's create a diagram: 1. Draw two separate graphs, one for the structural budget and one for the actual budget. 2. On both graphs, plot the government's revenues and expenditures depending on the output level. 3. On the structural budget graph, show that the government's revenues are greater than its expenditures at the potential output level, indicating a structural budget surplus. 4. On the actual budget graph, show that the government's expenditures are greater than its revenues at the current level of output, indicating an actual budget deficit. 5. Indicate the difference between the two budget balances (structural surplus and actual deficit) on the graphs. By following these steps, the diagram should illustrate the discrepancy between the structural budget surplus and the actual budget deficit.