Policy–Induced Shifts in the Aggregate Demand Curve and Macroeconomic Equilibrium

The economy can be moved towards or stabilized at the full
employment equilibrium level by use of discretionary macroeconomic policies
which lead to shifts in the aggregate demand curve. A rightward shift
(expansion) in aggregate demand will lead to increase in income, output and
employment without affecting the price level if the short-run aggregate supply
(SRAS) curve is horizontal.

Where the SRAS is upward sloping rightward shifts in the AD
curve will increase output, income and employment but will also lead to
increase in the price level while leaving income and output unchanged. For
example, shift in the AD curve from D1D1 to D2D2 increased income and output to
Y3 ,raised the price level from P1 to P2. The shift in AD in both cases are
equal,but the increased in output associated with the first shift (Y2Y1) is
greater than that associated with the second (Y3Y2). This is because of the
dampening effect of the price increase associates with the AD curve shifts from
D1D4 to D5D5, output and income would remain unchanged at Yf and all of the
expansion in AD would be translated to an increase in the price level (from P3
to P4).