Question

What is effective demand?

Answer 1

1. The starting point of Keynes’s theory of employment and income is the principle of effective demand.
2. Effective demand denotes money actually spent by the people on products of industry.
3. The money which entrepreneurs receive is paid in the form of rent, wages, interest and profit.
4. Therefore, effective demand equals national income.

Answer 2

Effective demand is the level of aggregate demand at which it equals aggregate supply. It represents the total spending in the economy that matches the total output produced, determining the equilibrium level of employment.