What happens to an economy when its increases in long-run aggregate supply are less than increases in aggregate demand?

Question

Multiple choice question.

It experiences mild deflation and economic growth.

It experiences mild inflation and economic growth.

It experiences a mild recession and high unemployment.

It experiences high unemployment and economic stagnation

Answer 1

When the increases in long-run aggregate supply (LRAS) are less than the increases in aggregate demand (AD), the economy tends to experience inflationary pressures because demand is outpacing supply. This can lead to mild inflation as prices rise due to increased demand without a corresponding increase in supply.

Thus, the correct answer is:

It experiences mild inflation and economic growth.