Final answer:
When increases in long-run aggregate supply are less than increases in aggregate demand, the economy generally experiences mild inflation and economic growth (option B). If not matched by supply growth, such conditions can lead to inflationary pressures over time. Over the long run, aggregate supply and natural unemployment rates will dictate real GDP levels as wages and prices adjust.
Step-by-step explanation:
When increases in long-run aggregate supply are less than increases in aggregate demand, an economy typically experiences mild inflation and economic growth. This is because the higher demand leads to higher prices, as the economy reaches or exceeds its full productive capacity. However, over time, this can lead to inflationary pressures as the increasing demand continuously outpaces the growth in supply. In the short term, this can stimulate economic activity and reduce unemployment, as firms hire more to meet the demand. Nevertheless, if the demand increases are not matched by increases in long-run aggregate supply, the economic growth can be accompanied by inflation.
In contrast, if aggregate demand decreases or does not keep up with increases in aggregate supply, the economy might experience deflation or disinflation, with declining prices potentially leading to lower levels of output and higher unemployment, as described in the provided reference material. Over the long term, neoclassical economics suggests that wages and prices will adjust, leading aggregate supply to determine the real GDP's size, with the unemployment rate adjusting to its natural rate.