Full text: Effective Demand in the Short Run and in the Long Run

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EFFECTIVE DEMAND IN THE SHORT AND IN THE LONG RUN 
I. 
When effective demand is created by one means or another the 
beneficial effects on employment in general will show themselves 
fairly soon (although it may take some time until the demand seeps 
through the anterior stages of production and further through 
income and consumption). After a time, however, there appear 
effects which go in the opposite direction. 
1. When the demand is created by investment in productive 
equipment and plant then new capacity will begin to become 
operative (unless the equipment merely replaces another one of 
equally large capacity which is at the same time withdrawn ).By 
that time,or soon after, the stimulating effects of the outlay on 
the equipment will have been largely exhausted. The new capacity 
will absorb effective demand which it will withdraw from other 
equipment. While the overall level of effective demand will be the 
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same as it was before the investment took place it will be spread 
over a larger total capacity (and presumably the profits will also 
be so spread ) thus the rate of utilisation will be lower and 
further investment will be accordingly discouraged. 
This outcome will depend crucially on the relative amounts of the 
spending on the investment and the capacity created, in other 
words on the capital-capacity ratio. For most industrial 
investment this ratio is probably lower than unity. Moreover the 
equipment usually will last for a number of years so that a net 
depressing effect is bound to appear sooner or later. 
2. The backlash against an additional effective demand will 
materialise also if this is generated not by investment but by 
deficit spending of the government, although the mechanism will be 
different here. To make it evident we shall assume permanent
	        

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