In macroeconomic theory, which is not justification for taking the price level as fixed?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → When the quantity produced changes, price does vary.
In macroeconomic theory, particularly in the short run, we often assume that the general price level is fixed. This assumption is justified when:
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The economy has unused or underutilized resources, meaning additional output can be produced without raising costs or prices.
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Marginal cost remains constant when output expands, so firms do not need to change prices.
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The law of diminishing returns is not yet operating fully because resources are not fully employed.
However, the statement “When the quantity produced changes, price does vary” contradicts the assumption of a fixed price level — it suggests that prices change when output changes.