Question

Assume, for a hypothetical economy, the following data is given :

Income (Y)	Consumption (C)	Investment (I)	Aggregate Demand (AD)
0	40	20	60
100	120	20	–
200	200	20	–
300	280	20	300

Define the term ‘Effective Demand’.

Hint:

Effective demand is the level of aggregate demand that is met by aggregate supply. It is the point where AD equals AS.

Answer 1

Step 1: Recall the two ideas involved:
Aggregate Demand (AD) is the total planned spending on goods and services at each level of income.
Aggregate Supply (AS) is the total value of goods and services that firms plan to produce at that level of income.

Step 2: Give the definition:
Effective Demand is that level of Aggregate Demand which is met by the corresponding Aggregate Supply in the economy.
In other words, it is the point where AD equals AS. At this point, what people plan to buy equals what firms plan to sell.

Step 3: Why it matters:
Only this level of demand decides the actual level of output and employment, since firms produce what they expect to sell.
Other levels of AD are not effective, because supply does not match them.

Step 4: Apply it to the given data:
In the table, AD is 300 when Y is 300. Here AD equals AS, so the effective demand of this economy is 300.

Final Answer:
Effective Demand is the level of AD which equals the corresponding AS in the economy.
\[ \boxed{\text{Effective Demand: AD = AS}} \]