Answer to Question #53075 in Other Economics for candy
Explain John Maynard Keynes’s concept of effective demand. How is the employment of
labor explained in this theory? How does this explanation differ from the neoclassical
interpretation of the labor market? Explain, using Keynes’s concept of effective demand, why
falling wages, in the context of unemployment, might not lead to the full employment of labor.
The principle of effective demand lies at the heart of Keynes’ general theory of employment. The dictum of the theory is that the volume of employment depends on the level of effective demand in an economy. A corollary, thus, may be drawn that unemployment is due to a deficiency of total demand (i.e., effective demand). Hence, Keynes’ employment theory may be described as the demand efficiency theory. Keynes designated the term “effective demand” to denote ’the total demand of goods and services (both for consumption and investment) by the people in a community. In a money economy, thus, effective demand manifests itself in the spending of income or the flow of expenditure.