Inflationary and deflationary gap

The inflationary gap is a macroeconomic term. In essence, real gross domestic product and the output level that would prevail if the economy is operating at full employment, i.e. potential GDP. It is when the actual aggregate demand is greater in comparison to the potential aggregate demand required. It triggers inflation because there is an increase in the general price level. ^^When the aggregate demand is in excess of the productive potential of the economy.^^

A deflationary Gap indicates the variance amidst actual aggregate demand for output in an economy. In essence, Real GDP and the maximum potential level of aggregate demand needed to set up full employment. It occurs when the actual aggregate demand is lower than the aggregate demand required. That is the fall in the general price level. When the aggregate demand is for an income level less as compared to the full employment level, the situation of deficient demand prevails, which results in a deflationary gap.