Consider the following statements summarizing the Keynesian model of income determination: 1. It assumes prices are fixed in the short run. 2. It rejects the concept of effective demand in determining income. 3. It suggests that equilibrium output is determined solely by the supply of factors of production. Which of the statements given above is/are correct?

Correct Option The correct option is 1 only Explanation The Keynesian model of income determination focuses on the short-run behavior of an economy. Unlike the Classical model, which emphasizes the supply side and flexible prices, the Keynesian framework prioritizes the role of aggregate demand in determining the equilibrium level of income and employment. Statement-wise Analysis - Statement 1 is Correct: A fundamental assumption of the simple Keynesian model is that prices and wages are fixed (or "sticky") in the short run. Consequently, the economy adjusts to shocks primarily through changes in output and employment levels rather than through immediate price adjustments. - Statement 2 is Incorrect: The concept of effective demand is central to Keynesian economics. Keynes argued that the level of income and employment is determined by the aggregate demand (effective demand) in the economy. The model explicitly relies on this concept rather than rejecting it. - Statement 3 is Incorrect: The idea that equilibrium output is determined solely by the supply of factors of production (labor, capital, technology) aligns with the Classical school of thought (Say's Law: "Supply creates its own demand"). In contrast, the Keynesian model suggests that in the short run, equilibrium output is determined by the level of aggregate demand, often below the full-employment level determined by supply factors. Key Takeaway: The Keynesian model posits that in the short run, prices are rigid, and equilibrium income is determined by aggregate demand (effective demand), whereas the Classical model assumes flexible prices and supply-determined output.

NCERT Class 12 Economics — Chapter 6: Determination of Income and Employment

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Consider the following statements summarizing the Keynesian model of income determination:

It assumes prices are fixed in the short run.
It rejects the concept of effective demand in determining income.
It suggests that equilibrium output is determined solely by the supply of factors of production.

Which of the statements given above is/are correct?

Official previous-year question

Verified 1 Aug 2026.

Options

A2 only
B1, 2 and 3
C1 and 3 only
D1 only

Did you get this right?

Solution

Correct Option

The correct option is

1 only

Explanation

The Keynesian model of income determination focuses on the short-run behavior of an economy. Unlike the Classical model, which emphasizes the supply side and flexible prices, the Keynesian framework prioritizes the role of aggregate demand in determining the equilibrium level of income and employment.

Statement-wise Analysis

Statement 1 is Correct: A fundamental assumption of the simple Keynesian model is that prices and wages are fixed (or "sticky") in the short run. Consequently, the economy adjusts to shocks primarily through changes in output and employment levels rather than through immediate price adjustments.
Statement 2 is Incorrect: The concept of effective demand is central to Keynesian economics. Keynes argued that the level of income and employment is determined by the aggregate demand (effective demand) in the economy. The model explicitly relies on this concept rather than rejecting it.
Statement 3 is Incorrect: The idea that equilibrium output is determined solely by the supply of factors of production (labor, capital, technology) aligns with the Classical school of thought (Say's Law: "Supply creates its own demand"). In contrast, the Keynesian model suggests that in the short run, equilibrium output is determined by the level of aggregate demand, often below the full-employment level determined by supply factors.

Key Takeaway: The Keynesian model posits that in the short run, prices are rigid, and equilibrium income is determined by aggregate demand (effective demand), whereas the Classical model assumes flexible prices and supply-determined output.

Your note

More from Chapter 6: Determination of Income and Employment

With reference to the government sector in the determination of income, consider the following statements: 1. Government expenditure adds to the aggregate demand similar to investment and consumption. 2. Taxes imposed by the government increase the disposable income of households. 3. In the absence of indirect taxes, the GDP is identically equal to the National Income. Which of the statements given above is/are correct?

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Match List I with List II and select the correct answer using the code given below: List I | List II A. Excess Demand | 1. Amplifies changes in autonomous expenditure B. Deficient Demand | 2. Leads to a decline in prices in the long run C. Multiplier | 3. Signals that supply exceeds demand D. Inventory Accumulation | 4. Leads to a rise in prices in the long run

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Consider the following statements regarding Savings in an economy: 1. Savings is defined as the portion of income that is used for tax payments. 2. The Marginal Propensity to Save (MPS) is the change in savings per unit change in income. 3. If the Marginal Propensity to Consume (MPC) is 1, the Marginal Propensity to Save (MPS) will be 0. Which of the statements given above is/are correct?

easy

What does "Negative Inventory Investment" signify in an economy? 1. A rise in the stock of finished goods. 2. A depletion of existing stock to meet excess demand. 3. A situation where planned sales are less than actual sales. Which of the statements given above is/are correct?

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With reference to the consumption function in an economy, consider the following statements: 1. Autonomous consumption is the consumption expenditure that occurs only when income is positive. 2. Induced consumption is the portion of consumption that varies directly with the level of income. 3. The marginal propensity to consume determines the rate at which induced consumption changes as income changes. Which of the statements given above is/are correct?

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Correct Option

The correct option is

1 only

Explanation

Statement-wise Analysis

Statement 1 is Correct: A fundamental assumption of the simple Keynesian model is that prices and wages are fixed (or "sticky") in the short run. Consequently, the economy adjusts to shocks primarily through changes in output and employment levels rather than through immediate price adjustments.
Statement 2 is Incorrect: The concept of effective demand is central to Keynesian economics. Keynes argued that the level of income and employment is determined by the aggregate demand (effective demand) in the economy. The model explicitly relies on this concept rather than rejecting it.
Statement 3 is Incorrect: The idea that equilibrium output is determined solely by the supply of factors of production (labor, capital, technology) aligns with the Classical school of thought (Say's Law: "Supply creates its own demand"). In contrast, the Keynesian model suggests that in the short run, equilibrium output is determined by the level of aggregate demand, often below the full-employment level determined by supply factors.