Explain the keynesian theory of employment section -
Answers
Answer:
Keynesian theory of employment states that effective demand signifies the money spent on the consumption of goods and services and on investment. The total expenditure is equal to the national income, which is equivalent to the national output. Therefore, effective demand is equal to total expenditure as well as national income and national output.
Effective demand = National Income / National Output
Therefore effective demand affects employment level of a country, national income, and national output. It declines due to the mismatch of income and consumption and this decline lead to unemployment.
With the increase in the national income the consumption rate also increases, but the increase in consumption rate is relatively low as compared to the increase in national income. Low consumption rate leads to a decline in effective demand.
Therefore, the gap between the income and consumption rate should be reduced by increasing the number of investment opportunities. Consequently, effective demand also increases, which further helps in reducing unemployment and bringing full employment condition.
Moreover, effective demand refers to the total expenditure of an economy at a particular employment level. The total equal to the total supply price of economy (cost of production of products and services) at a certain level of employment. Therefore, effective demand refers to the demand of consumption and investment of an economy.
