Question

In the first stage of macroeconomic theory, which of the following is assumed to be fixed?

Options

• The price level

• The level of investment

• The marginal propensity to consume

• The level of GDP

Answer 1

In the first stage of macroeconomic theory, the price level is fixed. Because unused resources are available, aggregate supply (GDP) can move up or down smoothly, and whatever the level of GDP, the same amount is supplied — the price level has no role.