In Chapter 3, Section II, Keynes argues that as employment increases, so does aggregate real income. This aggregate real income does not entirely funnel back into consumption, however, as some of it is saved and this constitutes aggregate investment. Thus, as employment increases, aggregate demand meets aggregate supply until a point (as opposed to classical theory which supposes that demand always tends to match supply, i.e. that “supply creates it own demand”).
Keynes also challenges the classical notion that employment is ultimately determined by whether real wages offset the marginal disutility of labor, and instead says that aggregate demand (consisting of , consumption or “propensity to consume”, and , or investment/saving) plays a more determining role regarding volume of employment, and that volume of employment, in turn, helps determine real wages.
He also says that, because volume of employment is inversely correlated with real wages, because the marginal utility of labor tends to decrease past some certain volume of employment, depending on the circumstances of production? Does this mean that the marginal efficiency of capital has a local maximum, given aggregate supply as a function of employment?