In an aggregate supply, aggregate demand curve, is the equilibrium point necessarily the full employment real output? Explain.
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Answers (1)
It depends. In classical model which aggregate supply is vertical, the change in aggregate demand will cause the price level to change. Producers will adjust nominal wage based on price so that the real wage will not change.And that comes to the Say's law which says "supply creates its own demand".In equilibrium, it is therefore full employment.
But the Keynesian model tells us that the real equilibrium output might not equal to the potential output or full employment in the short run. The aggregate demand might cut the 45 line under or over the potential output due mainly to the government spending is too little or too many. It's called deflationary gap or inflationary gap. In equilibrium, or aggregate demand =aggregate supply, it might be under or over full employment in the short run.
hard question indeed.
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