The federal budget exhibited a 128.7 billion surplus in 2001 but ...

[gonzo233]

The federal budget exhibited a 128.7 billion surplus in 2001 but moved to a deficit of 157.8 billion in 2002.
 
  Some argued the deficit was opened up because of the Bush 2001 tax cuts, but others argued that the deficit grew because of the recession suffered in 2001. Evaluate the validity of the second argument.

Question 2

Provide examples of goods or services whose elasticities of supply are (a) zero, (b) greater than zero but less than infinity, and (c) infinity.
 
  What will be an ideal response?

[harveenkau8139]

Answer to Question 1

Recessions increase the federal budget deficit because of automatic stabilizers in the economy. When GDP declines because of a recession, incomes and profits decline, causing tax revenues to decline. This will lower a budget surplus or increase a budget deficit. Falling GDP usually means rising unemployment, which increases government expenditures on unemployment insurance and other transfer programs. Increased government expenditures also lower a surplus or increase a deficit. Therefore, not all of the increase in the deficit was due to discretionary fiscal policy. Part of the increase in the deficit was a consequence of automatic stabilizers in the economy.

Answer to Question 2

Here are some examples:
a) The momentary supply of wheat is perfectly inelastic. Once farmers have brought their wheat to market, there is no other alternative use for it and they sell it all regardless of the going price.
b) The short-run supply of wheat. If the farmers already have a mature wheat crop but have not yet harvested it, farmers with both relatively high and low yield fields may chose to harvest both types of fields if the price for wheat is high. However, the farmers will not harvest their low yield fields when the price of wheat is relatively low to economize on added labor costs.
c) The supply of wheat to an individual buyer. Any one buyer can purchase as much wheat at the going price as he or she desires. However, no quantity of wheat will be supplied at a lower price.