When aggregate demand increases from AD1 to AD2, frms are unable to meet the growing demand with their current stocks and so start to expand output. This requires them to employ more workers. Thus, unemployment decreases. However, as the demand curve approaches full capacity, inflation begins to creep in. This is because now firm need to pay higher wages to attract more workers to further expand production levels. This then causes inflation. Also, the increasing demand itseld will push up the price. More understanding of this topic can be gained through looking at the Philips curve.