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Question
Define or explain the following concept :
Effective demand .
Solution
(i) According to Lord Keynes, the equilibrium between aggregate demand and aggregate supply determines the point of effective demand. It is the actual expenditure incurred by all the people, on all types of consumer goods and capital goods in the economy during a given period of time. The flow of expenditure, in turn, determines the flow of income.
(ii) Thus, in the economy : Effective Demand = Total Expenditure = National Income = National Output.
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