3) The Laissez-Faire Argument for Full Employment: As you now know, conservative economists generally argue that the unregulated capitalist economy will automatically tend to create jobs for all those who are willing to work at the appropriate market wage. First, draw a graph of the Aggregate Labor Market and explain how these laissez-faire economists use this model to argue that the capitalist economy will automatically correct temporary problems of unemployment. (Hints: Start from a situation with unemployed workers and then use the graph of the labor market to explain how this problem will be automatically eliminated by market forces. Be sure to explain all of the reasoning and assumptions that these economists make in order to draw both the labor supply and labor demand curves.) Also, precisely what does the equilibrium wage signify in this model? Is it considered a “fair” wage? Explain. Next, explain in some detail why these same economists argued that fluctuating interest rates also played an important role in guaranteeing that this full employment economy could be maintained. Finally, briefly explain two empirical (i.e., factual) criticisms of the conservative argument which we discussed in class.
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