During periods of growing domestic demand an import quota

 Options:

a. is less restrictive on a country’s imports than a tariff b. is more restrictive on a country’s imports than a tariff c. has the same restrictive effect on a country’s imports as a tariff d. will always generate increased tax revenue for the government

The Correct Answer Is:

b. is more restrictive on a country’s imports than a tariff

The correct answer is (b) “is more restrictive on a country’s imports than a tariff.” To understand this, let’s delve into the intricacies of import quotas, tariffs, and their respective impacts on domestic demand and trade.

Explanation of the Correct Answer: b. is more restrictive on a country’s imports than a tariff

An import quota is a trade restriction that limits the quantity of a good that can be imported into a country during a specified period. This restriction is often implemented to protect domestic industries and ensure their sustainability in the face of growing domestic demand.

The key point to note is that an import quota directly limits the quantity of imports, placing a strict cap on the amount of a particular good that can enter the country.

On the other hand, a tariff is a tax imposed on imported goods, effectively increasing their cost and making them more expensive for domestic consumers. While both import quotas and tariffs aim to protect domestic industries, an import quota is inherently more restrictive because it directly controls the quantity of imports.

The imposition of a quota results in a physical limitation on the amount of foreign goods that can enter the country, potentially creating shortages and limiting consumer choice.

Import quotas, by their nature, can lead to a more severe impact on domestic demand than tariffs. If domestic demand is growing, an import quota can hinder the ability of the market to meet this demand, potentially causing supply shortages and higher prices for consumers.

This restriction on the quantity of imports can also lead to reduced competition in the domestic market, limiting consumer options and potentially stifling innovation.

In contrast, a tariff affects the price of imported goods but does not directly limit the quantity that can enter the market. While tariffs can still have a restrictive impact on imports by making them more expensive, they do not impose a strict cap on the quantity, allowing for a more gradual adjustment to changing market conditions.

Explanation of Why Other Options Are Not Correct:

a. Is less restrictive on a country’s imports than a tariff:

This option is incorrect because, as explained above, an import quota directly limits the quantity of imports, making it inherently more restrictive than a tariff.

Tariffs, while imposing additional costs on imports, do not impose a strict cap on the quantity, allowing for more flexibility in response to market demands.

c. Has the same restrictive effect on a country’s imports as a tariff:

This option is incorrect because, as discussed, import quotas and tariffs have different mechanisms and impacts. Import quotas directly restrict the quantity of imports, potentially leading to shortages and a more severe impact on domestic demand. Tariffs, while still restrictive, do not impose a direct quantity limit.

d. Will always generate increased tax revenue for the government:

This option is incorrect because it refers to tariffs generating tax revenue, which is true. However, the question specifically relates to import quotas. Import quotas do not generate tax revenue for the government.

Instead, they control the quantity of imports, affecting the market dynamics without generating additional government revenue.

In summary, the correct answer is (b) because import quotas are more restrictive on a country’s imports than tariffs due to their direct control over the quantity of imported goods. The other options are incorrect as they misrepresent the nature and impact of import quotas compared to tariffs.

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