explain how the level of effective demand is attend in an economy AD is more than the AS
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Keynes’s Principle of Effective Demand:
The principle of ‘effective demand’ is basic to Keynes’ analysis of income, output and employment. Economic theory has been radically changed with the introduction of this principle. Stated briefly, the Principle of Effective Demand tells us that in the short period, an economy’s aggregate income and employment are determined by the level of aggregate demand which is satisfied with aggregate supply.
Total employment depends on total demand. As employment increases, income increases. A fundamental principle about the propensity to consume is that as the real income of the community increases, consumption will also increase but by less than income
Therefore, in order to have enough demand to sustain an increase in employment there must be an increase in real investment equal to the gap between income and consumption out of that income. In other words, employment can’t increase, unless investment increases.
We can generalize and say; a given level of income and employment cannot be maintained unless investment is sufficient to absorb the saving out of that level of income. This is the core of the principle of effective demand.
The principle of ‘effective demand’ is basic to Keynes’ analysis of income, output and employment. Economic theory has been radically changed with the introduction of this principle. Stated briefly, the Principle of Effective Demand tells us that in the short period, an economy’s aggregate income and employment are determined by the level of aggregate demand which is satisfied with aggregate supply.
Total employment depends on total demand. As employment increases, income increases. A fundamental principle about the propensity to consume is that as the real income of the community increases, consumption will also increase but by less than income
Therefore, in order to have enough demand to sustain an increase in employment there must be an increase in real investment equal to the gap between income and consumption out of that income. In other words, employment can’t increase, unless investment increases.
We can generalize and say; a given level of income and employment cannot be maintained unless investment is sufficient to absorb the saving out of that level of income. This is the core of the principle of effective demand.
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