Assuming that the economy is currently in a long-run equilibrium with real GDP equal to Y^*,a positive AD shock (with no change in the money supply)will eventually result in

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A positive AD shock (increase in aggregate demand) will shift the AD curve to the right. As a result, both the price level and real GDP will increase. Initially, the economy will operate above its potential output level (YS1) due to the increase in demand. However, in the long run, the increase in output will lead to an increase in the inputs' demand (such as labor). This increase in inputs' demand will lead to an increase in their price, which will shift the short-run aggregate supply (SRAS) curve to the left. Eventually, the economy will reach a new long-run equilibrium at a higher price level and the potential output level (YS1). Thus, there will be a higher price level and GDP at its potential level.

Assuming That the Economy Is Currently in a Long-Run Equilibrium