Question

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

• A. Aggregate supply
• B. Aggregate demand
• C. Effective demand
• D. Perfectly inelastic demand

Answer 1

The Correct Option is C

The scenario presented involves a situation where the supply of final goods is perfectly elastic and stable over a short timeframe. In this context, aggregate output is solely determined by the level of aggregate demand. This outcome is dictated by the principle of Effective demand.

In economic theory, 'Effective demand' posits that the level of output is contingent upon the prevailing demand, particularly when supply is perfectly elastic, enabling prices to remain static as output adjusts to fluctuations in demand. This principle aligns with Keynesian economics, which highlights demand-side influences on economic results.

The correct terminology to complete the statement is Effective demand.