Question

What is effective demand?

Hint:

Think "demand that works": effective demand pins down equilibrium income where AD = AS.

Answer 1

Keynes's idea: Employment depends on aggregate demand (AD). The intersection of the AD function with the aggregate supply (AS) function gives the point of effective demand.
Mechanism: When AD $>$ AS at a given income, firms expand output and jobs; when AD $<$ AS, they cut production, lowering income. Equilibrium income occurs where planned spending equals planned output.
Policy: During recessions, raising effective demand via public expenditure, tax cuts, or monetary easing can restore employment.
Contrast: Mere desire to buy is not effective; it must be supported by income/credit and willingness to spend.