A Level Economics AQA Practice Exam

What is a subsidy?

1. A payment to consumers to increase demand

2. A sum of money granted by the government to assist an industry

3. An increase in taxes to fund public services

4. A regulation that sets minimum prices for goods

The correct answer is: A sum of money granted by the government to assist an industry

A subsidy is a sum of money granted by the government to assist an industry, which helps reduce production costs or encourages the consumption of certain goods and services. By providing financial support, subsidies can lead to a decrease in market prices, making goods or services more affordable for consumers. This intervention can promote specific sectors of the economy, such as renewable energy or agriculture, and can help industries that may be struggling or are essential for social welfare. When a government decides to subsidize an industry, it aims to influence market dynamics positively, boost employment within that sector, or achieve broader economic or social goals, such as improving access to essential services. The nature of subsidies makes them an important tool in economic policy, enabling governments to steer the economy in a desired direction while maintaining stability and growth.