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Teaching Keynes's Principle of Effective Demand Using the Aggregate Labor Market Diagram

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  • Paul Dalziel
  • Marc Lavoie

Abstract

The authors suggest a way to teach Keynes's principle of effective demand using a standard aggregate labor market diagram that should be familiar to students taking an advanced undergraduate course in macroeconomics. The analysis incorporates Kalecki's version of the effective demand model to show Keynesian unemployment as a point on the aggregate labor demand curve inside the aggregate labor supply curve. The well-known Keynesian policy conclusions apply. In particular, workers and firms are unable to restore full employment by reducing real wages, underlining how important is the macroeconomic duty of the monetary and fiscal authorities to manage aggregate demand growth.

Suggested Citation

  • Paul Dalziel & Marc Lavoie, 2003. "Teaching Keynes's Principle of Effective Demand Using the Aggregate Labor Market Diagram," The Journal of Economic Education, Taylor & Francis Journals, vol. 34(4), pages 333-340, December.
  • Handle: RePEc:taf:jeduce:v:34:y:2003:i:4:p:333-340
    DOI: 10.1080/00220480309595227
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    File URL: http://hdl.handle.net/10.1080/00220480309595227
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    References listed on IDEAS

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    1. Victoria Chick, 1983. "Macroeconomics after Keynes: A Reconsideration of the General Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262530457, January.
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    Cited by:

    1. Corrado Andini, 2009. "Teaching Keynes’s Principle of Effective Demand within the Real Wage vs. Employment Space," Forum for Social Economics, Taylor & Francis Journals, vol. 38(2-3), pages 209-228, January.

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