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In the above Figure real national income is measured along OX axis and expected
revenue along OY. This 45 degree curve "OS" shows the aggregate supply. It
explains that which minimum revenue should be received to the producers and
they may be able to produce a particular amount of goods and services and may
be able to provide employment to the workers.
AGGREGATE DEMAND :Aggregate demand is the amount of consumption and amount of investment
expenditure at each level of income.
There are two components of aggregate demand.
1. Consumption expenditure ( C ).
2. Investment expenditure ( I ).
Aggregate demand can be expressed as Y = C + I
Consumption Expenditure :It depends upon the size of national income. If the size of national income is
greater then greater amount will be spent on consumption. In other words
the marginal propensity to consume is grater then the gap between consumption
and income is small and the level of employment will be high.
Investment Expenditure :The investment expenditure depends upon the following two factors :
1. Marginal Efficiency of Capital
2. Current Rate of Interest
If the marginal efficiency of capital is lower than the rate of interest, the demand
for investment will be low. The aggregate demand curve rises upward from left to
right.
EFFECTIVE DEMAND :According to Keynes the level of income and employment is determined at a
point there aggregate demand curve intersect aggregate supply curve.
Now by the following diagram we can explain it :