According to John Maynard Keynes, on which factor does the level of employment in an economy primarily depend?

Introduction / Context:
John Maynard Keynes was a famous economist whose ideas transformed macroeconomic theory and policy, especially during the Great Depression. One of his key contributions was to explain how overall demand in the economy determines output and employment levels. This question asks specifically what Keynes considered the main determinant of employment, so it tests understanding of a central concept in Keynesian economics.

Given Data / Assumptions:

• The question mentions Keynes by name, so it clearly refers to Keynesian theory.
• Options include aggregate demand, aggregate supply, effective demand and rate of interest.
• In Keynesian analysis, effective demand is a specific concept that combines expected demand for output with the level at which firms are willing to produce.
• We assume a closed economy without complications like external trade for simplicity.
• The focus is on the primary factor in Keynes view, not on secondary influences.

Concept / Approach:
Keynes argued that employment depends on effective demand, which is the level of demand at which aggregate demand intersects aggregate supply in the short run and firms decide on their output and employment level. While aggregate demand is related, effective demand is the point on the aggregate demand curve that actually determines output and employment given expectations and profitability. The rate of interest influences investment and therefore demand, but it is not the ultimate direct determinant of employment in Keynes system. Therefore, the correct concept to pick is effective demand.

Step-by-Step Solution:
Step 1: Recall that Keynes criticised the classical view that employment is determined mainly by wage flexibility and supply side factors. Step 2: Remember that in Keynesian theory, firms decide how much labour to hire based on the expected demand for their output. Step 3: Understand that the term effective demand, in Keynes language, refers to the level of aggregate demand that actually leads firms to produce and hire workers. Step 4: Compare the options and note that effective demand is more precise than simply aggregate demand. Step 5: Select effective demand as the correct answer, as employment in a Keynesian economy depends on it.

Verification / Alternative check:
A quick verification can be done by recalling the famous Keynesian statement that employment depends on effective demand. Textbooks on macroeconomics always highlight this phrase and explain that when effective demand is low, firms cut production and employment, leading to unemployment. When effective demand rises due to higher consumption and investment, firms expand output and hire more workers. The rate of interest enters the theory through its effect on investment demand, but Keynes never defined employment directly as a function of interest rate or aggregate supply alone. This supports the choice of effective demand as the central determinant.

Why Other Options Are Wrong:
Aggregate demand: Although closely related, Keynes specifically emphasised effective demand, which is the realised level at which aggregate demand equals aggregate supply in the short run. Aggregate supply: In classical theory employment is linked more to supply side, but Keynes argued that demand side conditions, not aggregate supply alone, determine actual employment. Rate of interest: This affects investment and thus demand, but it is only one variable in the system, not the main determinant of employment in Keynesian analysis. Any blank option: Not relevant, because Keynes used specific terms like effective demand in his theory.

Common Pitfalls:
Students sometimes confuse aggregate demand with effective demand and treat them as identical. Others may assume that since the rate of interest is frequently discussed by Keynes, it must be the main determinant of employment. The key is to remember that Keynes focus was on inadequate demand for goods and services leading to involuntary unemployment, and he summarised this with the concept of effective demand. Keeping this key phrase in mind helps avoid confusion in exam questions.

Final Answer:
According to John Maynard Keynes, the level of employment in an economy primarily depends on effective demand.