In the diagram of aggregate supply with the price level fixed, GDP is Rs 1,000 at point A on the horizontal axis. Where is the supply corresponding to point A shown, and how much is it?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → At point B, where the vertical line at A meets the 45° line; Rs 1,000 worth of goods
Every point on the 45° line has the same horizontal and vertical value. So at GDP of Rs 1,000, supply is read at point B on the 45° line, and it is Rs 1,000.
NCERT (2026-27): “Supply Side of Macroeconomic Equilibrium … In the first stage of macroeconomic theory, we are taking the price level as fixed. Here, aggregate supply or the GDP is assumed to smoothly move up or down since they are unused resources of all types available. Whatever is the level of GDP, that much will be supplied and price level has no role to play. This kind of supply situation is shown by a 45° line. Now, the 45° line has the feature that every point on it has the same horizontal and vertical coordinates. Suppose, GDP is Rs.1,000 at point A. How much will be supplied? The answer is Rs.1000 worth of goods. How can that point be shown? The answer is that supply corresponding to point A is at point B which is obtained at the intersection of the 45° line and the vertical line at A.” |