Unit 6 Lesson 2 - Activity 51

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6UNITMacroeconomicsLESSON 2 ■ ACTIVITY 51 (continued)7. What is the primary difference between the effects of a quota and those of a tariff?8. Suppose a country can impose either a quota that raises the domestic price to P 2as in Figure 51.2or a tariff that raises the domestic price to P 2. Explain whether domestic consumers would prefer atariff or a quota and why.Part CExport SubsidiesNations may choose to assist domestic industries by providing subsidies to an industry. The subsidieswould lower the costs and permit the industry to sell at a lower price. This assistance is called anexport subsidy because the industry can now compete on the world market and export some of itsproduct to other nations.9. Modify Figure 51.5 to show the effects of an export subsidy on domestic producers. Indicate as P Sand Q Sthe equilibrium price and quantity for domestic consumers after an export subsidy. Add twocurves to the graph: a Domestic Supply with Subsidy curve and a Total Supply with Subsidy curve.Figure 51.5Effects of a SubsidyDomestic Supply without SubsidyPRICEPP 1Total Supply without SubsidyDomestic DemandQQ 1QUANTITY298 Advanced Placement Economics Macroeconomics: Student Activities © National Council on Economic Education, New York, N.Y.
6UNITMacroeconomicsLESSON 2 ■ ACTIVITY 51 (continued)According to Figure 51.5 with your modification, what would be the equilibrium price and quantityfor(A) a completely closed economy (no imports and no subsidy)? __________________(B) an open economy (completely free trade) with no export subsidy? __________________(C) an open economy with a domestic export subsidy? __________________10. What is the effect of an export subsidy on the equilibrium price and quantity for domestic consumersrelative to the free trade equilibrium without a subsidy?11. If an industry receives a subsidy, what will happen at the equilibrium to domestic productionand the amount of imports?Advanced Placement Economics Macroeconomics: Student Activities © National Council on Economic Education, New York, N.Y. 299
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Unit 6 Lesson 2 - Activity 51

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