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If the supply of final goods is assumed to be infinitely elastic at a constant price over a short period of time, aggregate output is determined solely by the value of aggregate demand. This is called.

Solution

✅ Correct Option: 2

When prices are fixed and supply is perfectly elastic in the short run, output adjusts to whatever is demanded, so equilibrium output is determined solely by aggregate demand. This Keynesian idea is called the effective demand principle.

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