Deflationary Gap refers to Aggregate Demand falling short of Aggregate Supply at the full employment level of income. It is called deflationary because it brings in deflationary tendencies.
ADFE = Aggregate Demand at full employment level:
ADIU= AD at involuntary unemployment level. The point E is equilibrium point, where AD = AS. But at the current, deficient demand due to involuntary unemployment of ADIU, the aggregate demand FP is less than actual supply in the economy. Hence, EF is Deflationary Gap.
