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

Determination of Income and Employment

When, at a particular price level, aggregate demand for final goods equals 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 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 effective demand principle. An increase in autonomous spending causes aggregate output of final goods to increase by a larger amount through the multiplier process. Full employment level of income is that level of income where all the factors of production are fully employed in the production process. The equilibrium attained at the point of equality of Y and AD by itself does not signify full employment of resources. Equilibrium only means that if left to itself the level of income in the economy will not change even when there is unemployment in the economy. The equilibrium level of output may be more or less than the full employment level of output.

Which parameter does not determine the income and employment in the economy?

Fixed autonomous spending.

The correct answer is Option (3) → Fixed autonomous spending.

Note: This answer is as per NTA. However, there seems to be a mistake in the answer and the correct answer should be Option 2 as explained below.

Option 1: Fixed price level : This is an assumption used in the model to simplify analysis. It helps in determining aggregate demand which in turn determines the output. 

Option 2: Aggregate supply(Correct Answer): The passage clearly states that aggregate supply is perfectly elastic and output is determined solely by aggregate demand. This means aggregate supply is passive and does not determine income and employment.

Option 3: Fixed autonomous spending: The passage clearly states: “An increase in autonomous spending causes aggregate output… to increase through the multiplier process.” Autonomous spending (like investment, government spending) is a component of aggregate demand. Since aggregate demand determines income, autonomous spending also plays a direct role in determining income. So, this option is incorrect.

Option 4: Aggregate demand.The passage explicitly states that income and employment are determined by aggregate demand. Hence, this is clearly not the correct answer.