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

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.

Key Words:

• Kalecki
• Keynes
• unemployment

Additional information

Notes on contributors

Paul Dalziel

Paul Dalziel is a professor of economics at Lincoln University, New Zealand (e-mail: [email protected]). Marc Lavoie is a professor of economics at the University of Ottawa, Canada. This article was written while the first author was a Visiting Scholar at Wolfson College, Cambridge, UK, during 2001. The authors are grateful to Geoffrey Harcourt, Giuseppe Fontana, Timothy Taylor, Amal Sanyal, Hirschel Kasper, and two anonymous referees for helpful comments.