Inflationary gaps occur when the actual level of output in an economy exceeds the potential level of output, leading to upward pressure on prices. It represents a situation where the economy is operating above its long-run equilibrium.
Related terms
Aggregate Demand: The total demand for all goods and services in an economy at a given price level.
Potential Output: The maximum sustainable level of output that an economy can produce without putting pressure on prices.
Phillips Curve: A curve that shows the inverse relationship between unemployment rate and inflation rate; it suggests that reducing unemployment may lead to higher inflation, and vice versa.