Question

Explain the meaning of inflationary gap with the help of a diagram.

Answer 1

EF indicates the inflationary gap in the diagram.

Inflationary gap is the excess of aggregate demand over and above the 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.