Demographic Shock

Abstract

At the start, let the economy be in the steady state. Under these circumstances, a demographic shock takes place: Labour supply increases on its own. In the phase diagram merely the $\dot{w}=0$ line goes to the right, see figure 1. For the subsequent process of adjustment, have a look at the streamline. In the short run, the disturbance leaves no impact whatsoever on aggregate demand, output and labour demand. That is why the economy will suffer from unemployment.