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The Global Economy Unit Test

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Question
A country is a leading producer of lumber. They want to increase their export of lumber. They decide to impose a subsidy on the export of lumber. What are the result of this decision on exports, domestic consumers, and producers?(1 point)
Responses

The subsidy will decrease exports of lumber, lower prices for domestic consumers, and raise the price for producers.
The subsidy will decrease exports of lumber, lower prices for domestic consumers, and raise the price for producers.

The subsidy will increase exports of lumber and lower prices for domestic consumers and producers.
The subsidy will increase exports of lumber and lower prices for domestic consumers and producers.

The subsidy will increase exports of lumber and raise domestic prices for consumer and producers.
The subsidy will increase exports of lumber and raise domestic prices for consumer and producers.

The subsidy will decrease exports of lumber and raise the prices for domestic consumers and producers.
The subsidy will decrease exports of lumber and raise the prices for domestic consumers and producers.
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1 answer

The correct response to the question is:

The subsidy will increase exports of lumber and lower prices for domestic consumers and producers.

Here's why:

  • Increase in Exports: A subsidy on the export of lumber makes it cheaper for foreign buyers, incentivizing them to purchase more lumber from that country.

  • Lower Prices for Domestic Consumers: Since producers receive a subsidy for exporting, they can also lower their prices in the domestic market to sell more, leading to lower prices for domestic consumers.

  • Impact on Domestic Producers: The subsidy helps improve the profitability of producers who export, potentially leading to more production. However, domestic prices are likely to decrease due to the increased supply in the market.

So, in summary, the subsidy will lead to increased exports and lower prices for both domestic consumers and potentially for producers in the domestic market, due to increased competition and supply levels.