Tariffs generally:
Options
ARaise price
BLower price
CIncrease demand
DHave no effect
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International TradePYQ - Nov 2019 (Inter)Question 174 of 20
All Questions Correct Answer
✅ Option a — Raise price
All Options:
- ARaise price
- BLower price
- CIncrease demand
- DHave no effect
Detailed Solution & Explanation
To understand the effect of tariffs, let's break it down:
• Tariffs are taxes imposed by a government on imported goods or services, making them more expensive for consumers.
• When a tariff is imposed, the price of the imported good increases, as the importer has to pay the tariff and then pass on this cost to the consumer.
• This increase in price can lead to a decrease in demand for the imported good, as consumers may opt for cheaper alternatives or domestic products.
• The law of demand states that as the price of a good increases, the quantity demanded decreases, assuming all other factors remain constant.
The correct answer is right because tariffs increase the cost of imported goods, leading to higher prices for consumers.
Looking at the incorrect options, lower price and increase demand are not effects of tariffs, as tariffs increase the cost of goods and can decrease demand due to higher prices.
About This Chapter: International Trade
Paper
Paper 4: Business Economics
Weightage
10%
Key Topics
Theories, Trade Policy, Exchange Rates
This chapter explores trade between nations — why countries trade, the theories of Absolute and Comparative Advantage, Balance of Payments, Exchange Rate systems (Fixed vs Flexible), and India's trade policy including tariffs, quotas, and WTO rules.
View Official ICAI SyllabusExam Strategy Tip
Understand Comparative Advantage theory thoroughly — it's the foundation of international trade. Also focus on the Balance of Payments structure and what causes deficits.
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