The carpet industry in a developing country, A, was going through difficult time

Question

The carpet industry in a developing country, A, was going through difficult times. While this industry was once a major foreign exchange earner, there was a steady fall in production levels for the past three to four years. Workers, who had the requisite abilities to weave carpets, were finding it difficult to sustain themselves in this industry and began looking for opportunities elsewhere. Since the carpet industry was one of country A's oldest industries, many people lobbied the government to take some action. Widespread support from various groups induced the government to invest heavily in the carpet industry last year. This was expected to boost the industry's production level considerably. However, the increase in carpet production was much lower than expected.

Which of the following, if true, could explain this outcome?

A. The demand for carpets in the market is quite high.

B. The government also invested substantially in the auto industry this year.

C. Most manufacturing industries in country A have reported increasing production levels recently.

D. The country has been successful in restricting the inflation level within a tolerable band.

E. A new minimum wage law came into effect this year, increasing wage rates substantially.

Explanation / Answer

D. The country has been successful in restricting the inflation level within a tolerable band.

E. A new minimum wage law came into effect this year, increasing wage rates substantially.

Both options can be a cause . If the country has successfully restricted inflation then it has must reduced money supply in the economy . So aggregate demand has fallen in the economy . Hence even after heavy government investment the people are not buying carpets since there is less money in their hands , so production is also not increasing . But this rise in investment would cause demand to rise in long run .

A new minimum wage law has caused labor to become costlier . So unemployment rises . Hence production levels are below expectations .

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