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’* 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.
