Question

Explain the concept of inflationary gap with the help of a diagram. What is its impact on output, employment and price level in the economy?

Answer 1

EF indicates the excess demand or the inflationary gap.

Excess demand or inflationary gap is the excess of aggregate demand over and above its level required to maintain full employment equilibrium in the economy. It implies two things-

1) Planned aggregate demand in the economy happens to exceed its full employment level.

2) The level of aggregate demand surpasses the level of aggregate supply even when the available factors are fully utilized.