Question

In the Four-Graph macroeconomic long-run model (labor market, aggregate production function, diagonal line to shift Y, and AD-AS), what does it say about output and employment?

Answer 1

Equilibrium level of output is determined by the employment of labour. It is established by the demand and supply of labour. Labour will be demanded in the long run depending on the revenue earned when the total product produced is sold in the market. There is an increase in real wage when labour adjusts to a new equilibrium, which leads to higher level of potential output in the economy. Real wage increase leads to increase in income level and demand and supply increases as a result of it. Thus overall there is an increase in output and employment in the economy, all the factors play an important role in bringing about the new equilibrium level of output and employment.