Question

T/F/U. Aggregate labor demand is trickier than aggregate supply. Explain why or why not anddraw several graphs

consistent with your answer

Answer 1

It is FALSE that aggregate demand is tricker than aggregate supply. In contrast, aggregate supply is much trickier as it changes over time. In the long run, it represents a vertical line which shows that there are capacity constraints to resources and economy is at full employment level of output. Whereas in the short run, aggregate supply curve gets affected by the change in costs and profits and shifts accordingly. Exogenous shock or price level changes also bring about change in aggregate supply curve in the short run. However, when output goes beyond the full employment level then labor market becomes stringent and expectations of inflation rise as it is assumed that in the long run, supply cannot go beyond full employment level and so it puts pressure on prices to rise further till aggregate demand compensates to stabilize the economy which is Keynesian view. From the Classical perspective, wage-price flexibility will bring the economy back to equilibrium.