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CUET Economics 2025 PYQs22 May Shift 1. Free, no login required.

Macro

past year questions, CUET Economics 2025 22 May Shift 1

Income & Employment

past year questions, Macro, CUET Economics 2025 22 May Shift 1

Medium

Determination of Income and Employment

When, at a particular price level, the aggregate demand for final goods equals the aggregate supply of final goods, the final goods or product market reaches its equilibrium. Aggregate demand for final goods consists of ex ante consumption, ex ante investment, government spending etc. The rate of increase in ex ante consumption due to a unit increment in income is called marginal propensity to consume. For simplicity, we assume a constant final goods price and constant rate of interest over the short run to determine the level of aggregate demand for final goods in the economy. We also assume that the aggregate supply is perfectly elastic at this price. Under such circumstances, aggregate output is determined solely by the level of aggregate demand. This is known as the effective demand principle. An increase (decrease) in autonomous spending causes aggregate output of final goods to increase (decrease) by a larger amount through the multiplier process.

Effective demand principle situation occurs when _________

Solution

✅ Correct Option: 3

Effective Demand Principle

  • The government/economists assume that supply is perfectly elastic -> meaning producers will supply whatever amount is demanded, no questions asked
  • Since supply just "goes along" with demand -> the only thing that actually decides how much is produced is DEMAND
  • So aggregate demand becomes the sole driver of output -> this is the Effective Demand Principle

"Aggregate demand is only determinant of total output"

  • The passage directly says -> "aggregate output is determined solely by the level of aggregate demand"
  • Supply is elastic and adjusts automatically -> so it plays no independent role in deciding output

"Aggregate supply is only determinant of total output" -> WRONG because supply is assumed to be perfectly elastic, meaning it just follows demand passively, it has no independent deciding power

"Aggregate supply is perfectly inelastic" -> WRONG because the passage says the exact opposite, supply is perfectly ELASTIC, not inelastic. Perfectly inelastic means supply cannot change at all, which contradicts the passage completely

"Aggregate demand and supply determine the total output" -> WRONG because this would be the normal market equilibrium situation.

More from this set:

Question 46

The equilibrium in the final goods or production market reaches when .......

Question 47

Consumption, investment and government spending are the major components of ......?

Question 48

In the short run, to determine the level of aggregate demand for final goods in the economy, what will be the affect on price and rate of interest?

Question 50

A decrease in autonomous spending causes aggregate output of final goods to .................... through the multiplier process.

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