Unlike previous chapters, chapter 33 focuses on short run variables and the interaction of real and nominal variables (we ignore money neutrality and classical dichotomy). It is important to know that economic fluctuations are irregular and unpredictable, most macroeconomic quantities fluctuate together, and as output falls, unemployment rises. The model of aggregate demand and supply has two variables: the output of goods and services (real GDP) and the average level of prices (measured by the CPI or GDP deflator).
The aggregate-demand curve is a curve that shows the quantity of goods and services that households, firms, the government, and customers want to buy at each price level. The aggregate supply-curve is a curve that shows the quantity of goods and services that firms choose to produce and sell at each price level. Price level is on the vertical axis, while quantity of output is on the horizontal axis. This model may look like the simple supply and demand model in Chapter 4, but it shows all goods in services in all markets in the entire economy; there are no substitutions.
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