I'm reading through Mishkin "The Economics of Money, Banking, and Financial Markets". In chapter 23 (of the global 13th edition), they introduce the AS/AD framework. What confuses me is the following. Suppose we have a initial scenario
- LRAS at potential output $100$
- We observe to be at an output of $110$ which equates to inflatino of $2.5%$. This is where currently the AS intersects the AD.
Clearly inflation is above expectation. They argue that leads to worker demanding higher wages which leads to higher prices and somewhat lower output. This story continues until expected inflation meets inflation, i.e. AS, AD and LARS intersect in one point. This process has shifted the AS curve to the left/upward.
My question: Why is it that in the initial starting point of positive output gap it is the AS curve that adjust. Just looking at the picture couldn't it be that the demand curve shifts to the left/downward so that we intersect in a long run equilibrium with lower inflation?