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Question
Give reason or explain.
Aggregate demand is a positive function of the level of employment and output.
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Solution
Aggregate demand or Aggregate Demand Function (ADF) is a positive function of the level of employment and output as, when the level of employment and output increases, it results in an increase in the income of workers. This increase in income leads to an increase in expenditure of workers and thereby increases the aggregate demand.
Aggregate demand function or aggregate demand can be written as AD = f(N) where,
AD is Aggregate Demand
N is employment and output
f represents the functional relationship between the aggregate demand and the level of output and employment.
The following diagram depicts the positive relationship between aggregate demand, employment and output.
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