Why does the price level increase when aggregate demand increases?

This is the basic principle of supply and demand and is at
the heart of any market-based economy. Essentially, you must look at supply as the
quantity that is available of a given product. Demand refers to the relative number of
people who want that product. The greater the demand, the harder it is for the supply to
meet that demand. Producers can only create a certain amount of any one product in a
given amount of time and with a sometimes limited set of resources needed to create that
product. As a result, quantities (supplies) are limited, making them more valuable and,
consequently, making people who can afford to pay more willing to pay more. Sometimes,
even people who cannot afford to pay are willing to pay the price if the demand is great
enough. Conversely, when the supply ourweighs the demand, you end uo with a surplus. The
suppliers have created a product that consumers are not purchasing rapidly enough. In
this case, proces will be dropped in order to encourage people to buy the product and
reduce the supply.

For a look at some relevant graphs
explaining the process, see the following resource: