Question : Which of the following assumptions is made to determine the level of aggregate demand for final goods in the economy?
I. A constant final goods price and constant rate of interest over the short run are assumed.
II. The aggregate supply is assumed to be perfectly elastic.
Option 1: Only II
Option 2: Only I
Option 3: Neither I nor II
Option 4: Both I and II
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Correct Answer: Both I and II
Solution : The correct answer is Both I and II .
A constant final goods price and constant rate of interest over the short run are assumed as it helps to analyse the relationship between aggregate demand, and other macroeconomic variables such as consumption, investment, and government spending. The aggregate supply is assumed to be perfectly elastic.
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