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.