Which of the following statements about the supply side in the first stage of macroeconomic theory is NOT correct?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Aggregate supply rises only when the price level rises.
In the first stage the price level is fixed and there are unused resources. Whatever GDP is demanded is supplied, and the price level has no role.
Option (1) The price level is taken as fixed. — True. The first stage takes the price level as fixed.
Option (2) Whatever is the level of GDP, that much will be supplied. — True. Unused resources let supply move up or down with GDP.
Option (3) This supply situation is shown by a 45° line. — True. Every point on the 45° line has equal horizontal and vertical values, so supply equals GDP.
Option (4) Aggregate supply rises only when the price level rises. — False. Supply changes without any change in the price level.
NCERT (2026-27): “Supply Side of Macroeconomic Equilibrium … In the first stage of macroeconomic theory, we are taking the price level as fixed. Here, aggregate supply or the GDP is assumed to smoothly move up or down since they are unused resources of all types available. Whatever is the level of GDP, that much will be supplied and price level has no role to play. This kind of supply situation is shown by a 45° line. Now, the 45° line has the feature that every point on it has the same horizontal and vertical coordinates.” |