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 high unemployment and economic stagnation

It experiences mild inflation and economic growth.

It experiences a mild recession and high unemployment.

It experiences mild deflation and economic growth.

Answer 1

When increases in long-run aggregate supply are less than increases in aggregate demand, the economy typically experiences mild inflation and economic growth. This is because demand outstrips supply, leading to upward pressure on prices (inflation) while the economy continues to grow as it has not entered a recession.

So the correct answer is:

It experiences mild inflation and economic growth.