Correct Option
The correct option is 2 and 3 only.
Explanation
In the initial stages of macroeconomic theory, particularly within the short-run Keynesian framework, the aggregate price level is often assumed to be constant. This simplifies the analysis of income and employment determination by focusing on aggregate demand while assuming aggregate supply is perfectly elastic up to the point of full employment.
Statement-wise Analysis
- Statement 1 is Incorrect. In a market economy, prices are generally determined by the forces of supply and demand, not by government decree. The assumption of fixed prices in macroeconomic theory is a behavioral or structural assumption regarding the short run (price stickiness), not a result of legal enforcement.
- Statement 2 is Correct. The fixed price model assumes that the economy is operating with excess capacity, meaning there is unemployment of resources (labor and capital). Since the economy is operating below full employment, there is no immediate pressure on factor prices (wages, rent) to rise when output increases.
- Statement 3 is Correct. The existence of unused resources implies that firms can procure additional inputs at the prevailing market rates to increase production. Consequently, the marginal cost of production remains constant. Since costs do not rise with increased output, firms are willing to supply more goods at the existing price level.
Key Takeaway
The short-run fixed price assumption in macroeconomics is derived from the condition of underemployment equilibrium, where excess capacity allows output to expand without increasing marginal costs.