Which best describes what a subsidy does? a. it keeps the price of domestic goods relatively low. b. it raises the price of imported goods. c. it encourages the import of foreign goods. d. it eliminates all taxes on domestic goods.

The answer is: A) It keeps the price of domestic goods relatively low.

Explanation:

The main reason why subsidies exist, is to try to improve social efficiency. Usually public services are subsidized, like public transport (e.g. buses, subway). When people use the subway they aren't only saving money by not using their cars, but they are also polluting less, streets aren't as crammed, etc.

Now imagine who could build and operate a subway system other than the government. It is impossible, no company could afford to build a fully functional subway system and much less operate it at a low price. Therefore here the government with huge infrastructure projects and subsidizes.

When governments decide to subsidize products, for example milk, they do it to lower its price so that the quantity demanded increases. Drinking milk is not subsidized for its great taste, but because it's very good for kids to do it (it's a very healthy habit).