Question

2. Use supply and demand analysis to examine the following statement: “The practice of giving food stamps is self- defeating. Food stamps effectively lower the price of food. When food becomes available at lower prices, demand will increase thereby forcing the price up to its initial level.” Is this reasoning correct? Draw supply and demand curves to illustrate your answer.

Answer 1

Yes this reasoning is correct as price falls demand increases and when there is excess demand and supply is lower than demand prices increases and again comes it's initial level.as shown in diagram when food stamps are given to people price falls from P to P' so there is excess demand in economy and supply is less so prices again increases from P' to P at its initial level.

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