In the summer of 1972, due to extensive crop failure in the (former) Soviet Unio
ID: 1195313 • Letter: I
Question
In the summer of 1972, due to extensive crop failure in the (former) Soviet Union, Russia spent over $1 billion to purchase American wheat. Since the American crop had been completely harvested when the Russian deal was made, American farmers were unable to alter their wheat production plans for that year. What happened to price and quantity in the American wheat market?
a. Price increased, quantity increased
b. Price increased, quantity remained the same
c. Price remained the same, quantity increased
d. Price change uncertain, quantity change uncertain
Explanation / Answer
The right answer is “b”.
Since the production was already made and the necessary alter could not be done, the existing demand of American market was fulfilled with the remaining output. Aggregate demand becomes higher than aggregate supply, because a portion of output exported to other country. It increased the price of product, while total production of the country during the year remained the same.