Final answer:
If AD and LRAS grow at the same rate, inflation remains stable, and real GDP grows sustainably. Rapid growth in AD without matching LRAS growth leads to inflationary pressure, higher prices, but no change in output or employment. In a recession, expansionary policy can increase AD and help achieve full employment without causing long-run inflation.
Step-by-step explanation:
If aggregate demand (AD) and long-run aggregate supply (LRAS) grow at the same rate, in theory, inflation should remain stable and real GDP growth should be sustainable. This is because the increases in aggregate demand are met with proportional increases in the economy's full output capability.
However, should aggregate demand grow rapidly without a corresponding increase in LRAS, the result is inflationary pressure without an increase in output or employment. A vertical LRAS curve represents an economy at full employment, and any increase in AD beyond this point leads only to higher prices, keeping real GDP and the natural unemployment rate unchanged.
Conversely, in cases where there is expansionary fiscal policy during a recession, shifts in AD towards LRAS can help the economy reach the full employment level of output (potential GDP) and correct a recessionary gap, increasing both the price level and output (real GDP) without triggering long-run inflation, provided the AD shifts are not beyond LRAS.