Question

Define Effective Demand Principle.

Hint:

The level of aggregate demand is crucial in determining employment in an economy. Low demand leads to unemployment.

Answer 1

The Effective Demand Principle states that the total level of employment in an economy is determined by the level of aggregate demand (AD) for goods and services. 
If the aggregate demand is insufficient to purchase all the goods produced in the economy, there will be unemployment. 
The principle suggests that employment will adjust to the level where aggregate demand is sufficient to purchase all output.
In simple terms, the level of demand in an economy dictates the quantity of goods and services produced, which in turn determines the amount of labor employed. 
Conclusion: The Effective Demand Principle highlights the relationship between the total demand for goods and services and the level of employment in an economy.