Inflationary and Deflationary Gap
1 Quick Explanation 1–3 min
The inflationary gap is the excess of AD over the full-employment AD.
The deflationary gap is the shortfall of AD below full-employment AD.
Both are measured as vertical distances on the 45° diagram.
2 Detailed Notes
Definition
Definitions
- Inflationary gap = AD (actual) − AD at full employment, measured at YF. It causes demand-pull inflation because output can't rise beyond capacity.
- Deflationary gap = AD at full employment − AD (actual), measured at YF. It causes unemployment and falling prices.
Comparison
Key comparison
| Basis | Inflationary gap | Deflationary gap |
|---|---|---|
| Condition | AD > AD at YF | AD < AD at YF |
| Effect | Prices rise | Output & employment fall |
| Output level | Stuck at YF | Below YF (Y < YF) |
| Policy | Contractionary (raise rates, cut spending) | Expansionary (cut rates, spend more) |
Important
Measurement
Always measure the gap at the FULL EMPLOYMENT level (YF), not at the actual equilibrium. The gap is vertical (in income terms), not horizontal.
Diagram
Diagram check
45° line = AS. ADF = AD needed for YF. If actual AD (ADE) lies above ADF, shade the vertical gap at YF = inflationary gap. If ADE lies below ADF, shade = deflationary gap.
In One Minute
Inflationary gap = AD above full-employment AD → inflation. Deflationary gap = AD below full-employment AD → unemployment. Measure vertically at YF.
Important for Exam
- ⭐ 1-mark: define inflationary gap.
- ⭐ 3-marks: difference between the two gaps.
- ⭐ Diagram with shaded gaps at YF.
- ⭐ Policy to close each gap.
Watch & Learn
Watch on YouTubeClass 12th Economics: Inflationary & Deflationary gap (by CA. Parag Gupta)
by CA Parag Gupta
Why watch? Concept + diagram in one session.
Open on YouTube Watch on YouTubeClass 12th Economics: Inflationary & Deflationary gap (by CA. Parag Gupta)
by CA Parag Gupta
Why watch? Quick and clear for revision.
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