Question 38

Tariffs encourage consumers to reduce their consumption.

Tariffs are taxes imposed on imported goods, which generally lead to higher prices for those goods. As a result, consumers are likely to reduce their consumption of the more expensive imported products.

A) They increase the domestic quantity demanded.

This statement is incorrect because tariffs raise the price of imported goods, which typically leads to a decrease in the quantity demanded domestically. Higher prices discourage consumers from purchasing those goods, contrary to the assertion that demand would increase.

B) They encourage consumers to reduce their consumption.

This option is correct, as higher prices resulting from tariffs make imported goods less appealing to consumers. Consequently, consumers are likely to buy less of these goods and may turn to domestic alternatives or reduce overall consumption.

C) They increase the quantity of imports.

This statement is incorrect, as tariffs generally decrease the quantity of imports by raising their prices. Higher costs lead to a decline in demand for these goods, resulting in fewer imports entering the market.

D) They lower the price of affected imported goods below the world price.

This option is incorrect because tariffs actually increase the price of imported goods above the world price due to the added tax. Therefore, rather than lowering prices, tariffs make imported goods more expensive for consumers.

Conclusion

The correct answer is that tariffs encourage consumers to reduce their consumption due to the increased prices of imported goods. All other options fail because they misinterpret the impact of tariffs on prices, demand, and import quantities, highlighting the economic principle that tariffs restrict rather than promote consumption and trade.