Question

Effective demand is also called macro economic equilibrium.

Answer 1

According to Keynes effective demand is determined with the intersection of aggregate demand and aggregate supply in the economy

The aggregate demand consists of consumption demand, investment demand, government demand, and foreign demand. Similarly aggregate supply depends on natural resources, labour, capital and technology.

The equilibrium point of effective demand is that point, where aggregate demand function equals to aggregate supply function.

Effective Demand can be shown in the following diagram.

 

The diagram indicates.

ASF = Aggregate Supply Function Curve

ADF = Aggregate Demand Function Curve

e = Point of effective demand (Equilibrium point) is a point at which total expenditure is equal to total income i.e. ADF intersect ASF at this point.