The Importance of the Taylor Principle This figure shows the impact of a demand shock in an economy that does not satisfy the Taylor principle, so the dynamic aggregate demand curve is upward sloping. A demand shock moves the DAD curve to the right for one period, to DAD_t, and the economy moves from point A to point B. Both output and inflation increase. The rise in inflation increases expected inflation and, in the next period, shifts the dynamic aggregate supply curve upward to DAS_t+1. Therefore, in period t + 1, the economy then moves from point B to point C. Because the DAD curve is upward sloping, output is still above the natural level, so inflation continues to increase. In period t + 2, the economy moves to point D, where output and inflation are even higher. Inflation spirals out of control.