Ans. The Effective Demand Principle, introduced by economist John Maynard Keynes, states that the level of aggregate demand (total spending in the economy) determines the level of real output and employment in the short run. In other words, the principle posits that the equilibrium level of output and employment in an economy is determined by the level of effective demand, where effective demand refers to the total spending that firms are willing and able to undertake at various levels of income and prices. According to this principle, equilibrium output occurs when aggregate demand equals aggregate supply, and any imbalance between the two leads to changes in inventories and adjustments in output and employment levels.
