Match List-I with List-II, on macroeconomic equilibrium:
| List-I | List-II | ||
|---|---|---|---|
| (A) | First stage of the analysis | (I) | It is just a simplifying assumption, which will be changed later |
| (B) | Second stage of the analysis | (II) | The price level is allowed to vary |
| (C) | Reason for a fixed price level based on the state of the economy | (III) | The price level is taken as fixed |
| (D) | Reason for a fixed price level based on the method of analysis | (IV) | There are unused resources, so the law of diminishing returns does not apply |
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → (A) - (III), (B) - (II), (C) - (IV), (D) - (I)
Macroeconomic theory works in two stages, and there are two reasons for taking the price level as fixed in the first stage.
| List-I | List-II | Reason |
|---|---|---|
| (A) First stage of the analysis | (III) The price level is taken as fixed | First, equilibrium is worked out with the price level fixed. |
| (B) Second stage of the analysis | (II) The price level is allowed to vary | Then the price level is allowed to vary. |
| (C) Reason for a fixed price level based on the state of the economy | (IV) There are unused resources, so the law of diminishing returns does not apply | With unused resources, more output needs no rise in marginal cost, so prices stay the same. |
| (D) Reason for a fixed price level based on the method of analysis | (I) It is just a simplifying assumption, which will be changed later | The fixed price is a simplifying assumption of the method. |
The two stages and the two reasons are different things. The stages are steps of the analysis; the reasons justify the first stage only.
NCERT (2026-27): “4.3 Determination of Equilibrium Income in the Short Run You would recall that in microeconomic theory when we analyse the equilibrium of demand and supply in a single market, the demand and supply curves simultaneously determine the equilibrium price and the equilibrium quantity. In macroeconomic theory we proceed in two steps: at the first stage, we work out a macroeconomic equilibrium taking the price level as fixed. At the second stage, we allow the price level to vary and again, analyse macroeconomic equilibrium. What is the justification for taking the price level as fixed? Two reasons can be put forward: (i) at the first stage, we are assuming an economy with unused resources: machineries, buildings and labours. In such a situation, the law of diminishing returns will not apply; hence additional output can be produced without increasing marginal cost. Accordingly, price level does not vary even if the quantity produced changes (ii) this is just a simplifying assumption which will be changed later.” |