Inflationary Gap- The excess of actual aggregate demand over aggregate supply at full employment equilibrium point is called inflationary gap.
When AD > AS this lead to price rise or inflation so it’s called inflationary gap. We can show it with the help of diagram as follows.
In diagram EF shows inflationary gap.
Impact on the Economy- As aggregate demand is greater than aggregate supply; producers want to produce more output. But output cannot increase as there is nonavailability of resources due to full employment.
Income - Real income cannot increases because real output can’t increase only money income will increase
Price - Price will increase. It will lead to an increase in monetary income.
Measures to correct inflationary gap-
• Reduction in government expenditure -
• Increase in taxes
• Reduction in availability of credit - By increase in bank rate, increase in CRR & SLR, sale of securities by central bank, increase in margin requirement etc.
