Question

What is effective demand? How will you derive the autonomous expenditure multiplier when price of goods and the rate of interest are given?

Answer 1

If the elasticity of supply is infinite, then the output will be solely determined by the aggregate demand at this price in the economy. This called effective demand. The equilibrium output and aggregate demand at the given price of goods and rate of interest is derived by solving the equation.

Y = AD. 

Y = A + CY or Y – CY = A

or Y(1 – C) = A 

A is the total value of autonomous expenditure. 

The value of Y is dependent on the value of parameters A and C.