Read the passage carefully and answer the questions based on the passage:

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.

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

Price will constant and rate of interest remain constant.

The correct answer is Option (2) → Price will constant and rate of interest remain constant.

As stated in the passage, for simplicity, it is assumed that the price of final goods and the rate of interest remain constant in the short run to determine the level of aggregate demand. This assumption allows economists to focus solely on the relationship between income and spending without the complication of changing prices or interest rates.