When there is an increase in aggregate demand, firms need to produce more goods and services, leading to an increase in the demand for labor. This is represented by a rightward shift of the labor demand curve. As a result, the equilibrium quantity of labor increases, leading to a decrease in unemployment.

 

However, the increase in aggregate demand does not lead to an increase in the real wage. The real wage is the purchasing power of the wage rate, taking into account changes in the price level. In the traditional Keynesian model, it is assumed that prices are sticky in the short run, meaning they do not adjust immediately to changes in demand. Therefore, when there is an increase in aggregate demand, firms increase production by hiring more workers without increasing wages proportionally. This leads to a lower real wage. Do you agree or not? Why?

Answer rating: 100% (QA)

Yes I would agree with the above explanation and heres why The labor demand curve represents the rel... View the full answer