Question

Give the shortcomings of effective demand.

Answer 1

Economists such as Hutt and Hazlitt have highlighted several limitations in the principle of effective demand. They argue that adding the term ‘effective’ before, demand is both unnecessary and questionable. Although Keynes outlined a specific connection between effective demand (Ed), income (Y), and employment (N), this relationship is not entirely comprehensive. Additionally, the theory does not apply well to underdeveloped nations, and Keynes based his analysis on the assumption of a closed economy.