Aggregate output determined by effective demand from "summary" of The General Theory of Employment, Interest, and Money by John Maynard Keynes
The level of aggregate output is not determined by the capacity of the economy to produce goods and services, but rather by the level of effective demand. Effective demand is the aggregate expenditure on goods and services in an economy at a given price level. When there is a deficiency in effective demand, businesses will not produce goods and services up to the full capacity of the economy. This leads to unemployment and underutilization of resources. In order to achieve full employment and utilize the economy's full capacity, it is necessary to ensure that effective demand is at a level that will incentivize firms to produce at their maximum potential. Keynes argues that the level of effective demand is influenced by a variety of factors, including consumption, investment, government spending, and net exports. Changes in any of these components can impact the level of aggregate output in the economy. For example, an increase in consumer spending can lead to higher levels of aggregate output, while a decrease in investment can have the opposite effect. In order to achieve full employment and stable economic growth, it is essential to manage and stimulate effective demand through policy interventions. This can include fiscal policy measures such as government spending and tax cuts, as well as monetary policy actions like interest rate adjustments. By understanding the relationship between aggregate output and effective demand, policymakers can work towards creating a more stable and prosperous economy. It is important to recognize that the level of aggregate output is not determined by the economy's capacity to produce, but rather by the level of effective demand in the economy.
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