With an aid of AS-AD diagram, explain the effect on output and price level when imported goods become more desirable to local customers

When foreign goods become more desirable to local customers, the import of goods increases, the aggregate demand decreases. The price level will decrease and the output level will decrease in the short run.

The deflationary gap will result in a downward pressure on the input prices. In the long run, wages will adjust downward and the SRAS will increase. The price level will decrease and the output will restore to its original level.