Demand management key to economic stability from "summary" of The General Theory of Employment, Interest, and Money by John Maynard Keynes
The level of effective demand, which is the sum of consumption and investment, plays a crucial role in determining the level of employment and output in an economy. If aggregate demand falls short of the potential level of output that the economy is capable of producing, there will be involuntary unemployment. In such a situation, the economy is said to be in a state of disequilibrium. When there is inadequate aggregate demand, businesses produce less, leading to a decrease in output and employment. This, in turn, reduces incomes and further diminishes aggregate demand, creating a vicious cycle of declining economic activity. To break this cycle and achieve full employment, it is essential to manage and stabilize aggregate demand through various policy interventions. Demand management involves using fiscal and monetary policies to influence the level of aggregate demand in the economy. Fiscal policy entails government spending and taxation measures to stimulate demand when it is deficient and restrain it when it is excessive. On the other hand, monetary policy involves adjusting interest rates and money supply to control borrowing and spending in the economy. By actively managing aggregate demand, policymakers can stabilize the economy and promote full employment. When demand is maintained at a level that corresponds to full employment, resources are fully utilized, and the economy operates efficiently. Additionally, stable demand helps prevent fluctuations in output and employment, reducing the likelihood of economic crises such as recessions and depressions.- Demand management is essential for achieving economic stability and full employment. By ensuring that aggregate demand aligns with the economy's productive capacity, policymakers can promote sustainable growth and prosperity. Through coordinated fiscal and monetary policies, governments can effectively manage demand fluctuations and steer the economy towards equilibrium.
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