An expansionary demand shock disturbs the equality of output (GDP) and price level. The process of adjustment finally restores equality of actual GDP and potential GDP but at a higher price level, as shown.


 In both the parts (i) and (ii) of E₀ is the initial equilibrium point, where AD₀ curve intersect SRAS₀ curve. The actual level of GDP equals the potential level Y* at the price level P_0. Now, additional investment spending causes a demand shock and the AD₁ curve in part (i) shifts upwards to AD₁. This cases increase in both GDP and the price level. At the new equilibrium point E₁ in both the parts (i) and  (ii) the new and higher level of GDP is Y₁ and the price level also rises to P₁.

Since actual GDP (Y₁) is more than potential GDP (Y*). It opens inflationary gap shown by arrow in part (i). Inflationary gap (Y₁-Y*) results into increase in the input costs, including the cost of labour, shifting the SRAS₀ curve leftwards to SRAS₁, as shown in part (ii). New equilibrium point is E₂ where AD₁ intersects the new aggregate supply curve SRAS₀. At point E₂ inflationary gap is eliminated as shown by arrow in part (ii) and actual GDP again becomes equal to potential GDP, but at a higher price level P₂.

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