Aggregate output is determined solely by the level of aggregate demand. This is known as effective demand principle. Which of the following is not the assumptions behind this principle?

Option 1 -> Constant prices allow demand to determine output without price adjustments.

Option 2 -> Fixed interest rates simplify the analysis in short-run Keynesian models.

Option 3 -> Perfectly elastic aggregate supply (horizontal AS curve) means firms supply any quantity at current prices, letting demand determine output.

Option 4 -> This is NOT an assumption; aggregate demand determines output level but is not perfectly elastic itself.

Hence, Aggregate demand is perfectly elastic -> The effective demand principle assumes that aggregate supply is perfectly elastic (not aggregate demand). This means the AS curve is horizontal, allowing output to expand or contract based on demand at a given price level. If aggregate demand were perfectly elastic, it would imply infinite demand at a price, which contradicts the principle that demand determines the specific level of output. The principle requires demand to vary and determine output, not to be infinitely elastic -> correct