What characterizes a subsidy?

A subsidy is characterized as a payment made by the government to domestic firms, which is aimed at supporting them financially. This support can take various forms, such as direct cash payments, tax reductions, or favorable loans. The purpose of providing subsidies is typically to encourage production, lower prices for consumers, or enhance competitiveness in both domestic and international markets. By providing financial assistance, the government can help domestic firms overcome challenges such as high production costs or foreign competition, ultimately contributing to economic growth and job creation within the country.

The other options describe different economic tools or policies. For example, a tax applied to imported goods refers to tariffs, which are designed to increase the price of foreign products in order to protect domestic industries. An agreement to limit exports pertains to trade agreements that may stipulate restrictions to manage supply and demand. Lastly, a restriction on the number of imports involves quotas or other limitations, which are used to control trade levels and protect local markets. Each of these does not define a subsidy but rather represents different mechanisms of trade regulation and economic policy.