Assertion (A): In the short-run fixed-price model, a rise in aggregate demand raises output without raising the price level.
Reason (R): Aggregate supply of final goods is assumed to be perfectly elastic at the given price.
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Both (A) and (R) are true and (R) is the correct explanation of (A).
Assertion (A): In the short-run fixed-price model, a rise in aggregate demand raises output without raising the price level. — True. Output is decided solely by aggregate demand at the fixed price.
Reason (R): Aggregate supply of final goods is assumed to be perfectly elastic at the given price. — True. This is an assumption of the short-run model.
A is about the effect of a rise in AD. R is about the shape of aggregate supply.
Why R explains A? A perfectly elastic supply means any amount can be supplied at the given price. So a rise in demand is met by more output, and the price does not need to rise.
NCERT (2026-27): “Summary … 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.” |