Explanation:
When aggregate demand increases, it can have different effects on aggregate supply depending on the state of the economy. Let's break down the options and understand why the correct answer is option 'D' - Both A and B.

a) Excess capacity:
Excess capacity refers to the situation when a firm is capable of producing more output than it currently is. This means that there is idle or unused capacity in terms of labor, capital, and other resources. When there is excess capacity in the economy, an increase in aggregate demand can lead to an increase in aggregate supply. This is because firms can utilize their idle resources to produce more goods and services in response to the higher demand.

b) Underutilization of existing resources:
Underutilization of existing resources means that the economy is not operating at its full potential. There are idle or unemployed resources such as labor, capital, and land. In this situation, an increase in aggregate demand can lead to an increase in aggregate supply as firms will hire more workers, invest in more capital, and utilize their resources more efficiently to meet the higher demand.

c) Overutilization of existing resources:
When aggregate demand exceeds the capacity of the economy to produce goods and services, it leads to overutilization of existing resources. In this scenario, firms are already operating at their maximum capacity, and there is no room to increase production further. Overutilization can lead to bottlenecks, inflationary pressures, and a decline in the quality of output.

Conclusion:
The correct answer is option 'D' - Both A and B. When aggregate demand increases, aggregate supply will increase only when there is excess capacity and underutilization of existing resources. In these situations, firms have the ability to increase production to meet the higher demand. However, if there is overutilization of existing resources, aggregate supply cannot increase further, leading to potential supply-side constraints.