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Meaning of Effective Demand

Effective demand, thus, is equal to the level of national income, i.e., the aggregate factor income in the form of wages, rent, interest, profit, etc. The income earned by the factors is spent on the goods and services produced in the economy. Therefore. Effective demand can also be expressed in terms of the total value of output in the economy.

It should, however, be remembered that every level of demand s not effective only that level of demand is effective which is met by a corresponding supply. In case, the level of aggregate expenditure of demand is high but adequate supply of goods and services is not forthcoming, the level of effective demand employment will remain very low. Therefore, the equilibrium level of effective demand or full employment is attained when the aggregate demand equals the aggregate supply.

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