I've read in a few places that increased income/wages shifts SRAS to the left, which makes sense because firms' costs are increasing to pay for them. My textbook says that there's no effect on aggregate demand, but this doesn't make sense to me because if people have more income to spend then at each given price level of goods in the economy the amount consumers are are willing to buy will increase, shifting aggregate demand to the right (at least in the long run).

Side note: I'm asking because I'm curious about what this means for the monetarist/neoclassical view of macroeconomic equilibrium; specifically, why aggregate demand does not change between long and short run and why aggregate supply moves to the intersection of LRAS and AD.


1 Answer 1


Because higher wages do not necessarily mean that national income increased. From macroeconomic perspective national income is output. Higher wages in these simple models do not necessarily translate into higher output.

For example if these higher wages come from company’s profit then on one hand one (worker) household income increases but another (entrepreneur) household income decreases. Assuming all households have the same marginal propensity to consume this would not affect aggregate demand or national income. This is not necessarily realistic assumptions and there are more complex models that relax it, in that case higher wages could boost aggregate demand.

Also the side note is the same question you already asked here.

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    $\begingroup$ Thank you. Also about the side note, yeah. I had an even more fundamental misunderstanding too; I thought that wages were included in price levels so if price levels were to increase so would wages, thus not changing quantity demanded as price levels rise, but I see that this is not the case now. $\endgroup$ Feb 4, 2020 at 16:40

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