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.

Effective demand principle situation occurs when .....

Aggregate demand is only determinant of total output.

The correct answer is Option (3) → Aggregate demand is only determinant of total output.

As per the passage, under the assumption that aggregate supply is perfectly elastic at a constant price, the level of output is determined solely by aggregate demand. This situation is described as the effective demand principle, where changes in autonomous spending influence output through the multiplier process.

"Effective demand principle: If the supply of final goods is assumed to be infinitely elastic at constant price over a short period of time, aggregate output is determined solely by the value of aggregate demand. This is called effective demand principle."