How does the aggregate goods and services market differ from the regular supply and demand graph in Chapter 3? Address the measures of price, quantity, and the demand and supply curve(s)

Answer 1

In the aggregate goods and services market, the price is the average price level, which is usually measured by a price index such as the GDP deflator. In the regular market model, the price was just the price of a single good. The quantity in the aggregate goods and services market is the real GDP, or real output, of the country, not just the output of a single good as it was in the one-market model. The aggregate demand curve differs from the regular demand curve substantially. The single-market demand curve signified that consumers would buy more of a single good as its price fell (holding the prices of all other goods constant). In the aggregate market, a decrease in price is a decrease in the average level of prices, and thus, downward slope does not reflect the substitution among domestically produced goods. The aggregate demand curve slopes downward because of (1) the real balance effect, (2) the international substitution effect, and (3) the interest rate effect. The aggregate supply is divided into two supply curves: the short-run aggregate supply and long-run aggregate supply. The short-run aggregate supply's upward slope shows that firms can expand output in response to a rising price level only in the short run. The long-run aggregate supply's vertical shape shows that in the long run a country's production is limited by its resource base.