To clarify what ns2201 said, an increase in aggregate demand (a
rightward/upward shift of the negatively-sloped AD curve) will cause
BOTH the short-run real GDP (y) to rise (as shown on the x-axis) AND
the price level to rise.
This means that your new equilibrium point will have a higher price
level and a higher real GDP (it will be up and to the right from the
original equilibrium - wherever the newly-shifted AD curve intersects
the AS curve).
However, the increase to y only lasts in the short run - remember that
after any aggregate demand or supply shock (expansionary or
contractionary), the AS curve will slowly shift back until the
equilibrium real GDP is restored at the long-term real GDP (the y*
line). As such, although both real output and price level are
affected in the short-term by an AD shock, in the long run, only price
level is affected. Economicts refer to this as the 'long-run
neutrality of money'. Good luck! |