Fabriland is currently in the midst of a deep economic recession. The country is dependent on the local textile industry, which has suffered in recent years from increased foreign competition and a mysterious livestock epidemic that wiped out 95% of Fabriland's sheep and cow population. In an effort to help boost the economy and help Fabriland diversify away from textiles, the government decides to increase government spending. How are price and output affected in the AD/AS model

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02-12-2021
Business

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Fabriland is currently in the midst of a deep economic recession. The country is dependent on the local textile industry, which has suffered in recent years from increased foreign competition and a mysterious livestock epidemic that wiped out 95% of Fabriland's sheep and cow population. In an effort to help boost the economy and help Fabriland diversify away from textiles, the government decides to increase government spending. How are price and output affected in the AD/AS model

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anthougo anthougo · Answer 1 · 2021-12-11T09:59:12-05:00

Given Fabriland's economic recession, the international price of its textile products will be drastically reduced, thereby constraining its output and GDP.

The reduced price of products will hamper Fabriland's ability to ensure that its AD-AS (aggregate demand-aggregate supply) is in equilibrium.

However, with the increased government spending for economic diversification, the price and output of Fabriland, together with its AD/AS model will help it out of its over-reliance on textile income.

Thus, the country's AD/AS model will likely improve with the increased government spending for diversification of its economic base, leading to increased GDP and reduced inflation.

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