What occurs when aggregate demand exceeds aggregate supply?

When aggregate demand exceeds aggregate supply, the economy experiences demand-pull inflation. This phenomenon arises when the total demand for goods and services in an economy surpasses the total supply available at current price levels. As a result, businesses may respond to this heightened demand by raising prices, leading to inflation. This type of inflation is characterized by the idea that too much money is chasing too few goods.

The other options do not accurately reflect the consequences of a situation where aggregate demand outstrips aggregate supply. Increased production efficiency would generally occur in a different context, where suppliers can meet or exceed demand through improved processes, not when demand exceeds supply. A surplus in the economy refers to a situation where supply exceeds demand, which is the opposite scenario. Finally, while higher aggregate demand can lead to lower unemployment in the long run, it does not eliminate unemployment entirely; instead, it may reduce some forms of cyclical unemployment in the short term as businesses ramp up production to meet demand. Thus, the correct interpretation of what happens when aggregate demand exceeds aggregate supply points directly to demand-pull inflation.