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Say's lawthe proposition that AGGREGATE SUPPLY creates its own AGGREGATE DEMAND. The very act of producing a given level of national output generates an amount of income (wages, profits, etc.) exactly equal to that output, which, if spent, is just sufficient to take up the purchases of the whole of the output that has been produced. It follows that, in order to reach the full-employment level at national output, all that needs to be done is to increase aggregate supply.
The key assumptions are that the economic system is ‘supply-led’ and that all income is spent. In practice, however, some income is leaked’ into saving, taxation, etc. (see CIRCULAR FLOW OF NATIONAL INCOME) and there is no automatic guarantee that all this income will be subsequently ‘injected’ back as spending. Thus, in contrast to the above proposition, the economic system is ‘demand-led’, a fall in aggregate demand leading to a multiple contraction of national income and output. See EQUILIBRIUM LEVEL OF NATIONAL INCOME.