Final answer:
The statement is true. Short-term economic fluctuations are primarily influenced by changes in aggregate demand, which impact output and employment. In the long run, aggregate supply factors determine the level of potential output, with prices and wages adjusting to align actual output with this potential.
Step-by-step explanation:
The statement 'Demand can affect output and employment in the short run, whereas supply is the ruling force in the long run' is true. In the short run, changes in aggregate demand can indeed have a significant impact on output and unemployment due to price and wage rigidity. Sudden increases or decreases in demand can lead to more prominent fluctuations in the overall level of employment and the production of goods and services. However, this impact is generally temporary. In the long run, the neoclassical perspective asserts that as wages and prices become more flexible, the economy tends to adjust and return to its potential GDP. This adjustment happens through movements in wages and prices that cause the short-run Keynesian aggregate supply curve to shift, typically leading to a change in the level of prices, while the actual output aligns with the potential output determined by aggregate supply factors such as technology, physical capital, and labor.