Just this week, the U.S. Senate passed legislation, approving $52 billion in subsidies for chip makers, to build and operate facilities in the United States. As we have discussed in class, there has been a shortage of chips due to supply chain constraints, mostly attributed to Covid. This has caused decreases in production in automobiles, computers and gaming consoles. The argument that the government is presenting is two-pronged. First, there is concern about relying on foreign manufacturing, given the transportation challenges of today. Second, the war in Ukraine, has changed our perception, whereby security has moved to the forefront of people's minds. In fact, James Bullard, the President of the Federal Reserve Bank of St. Louis, recently stated that he sees the U.S. moving to a "just-in-case" mentality.

Part 1 - Discuss the affects of subsidies on the supply chain, and explain where market equilibrium will fall. State whether the supply curve shifts, or there is a movement along the supply curve. State whether the new price and quantity of chips would be higher or lower (Hint: subsidies are a determinant of non-price supply chain factors - see Chapter 3. It is easier if you draw it out on scratch paper to visibly see the changes you are proposing).

Part 2 - Discuss the affects of these subsidies on free-trade (Remember David Ricardo from Chapter 2). Do you agree, or disagree with the governments position? Why, or why not?