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An increase in aggregate demand causes an inflationary gap when starting from a full-employment equilibrium.
The difference between the actual gross domestic product (GDP) at the equilibrium present and the GDP that would be present if an economy were inflationary gap experiencing full employment is known as the inflationary gap, a macroeconomic concept.
There is an inflationary gap when there is a surplus of demand for products and services over supply because of things like higher levels of overall equilibrium employment, more active trade, or higher government spending.
In this environment, the real GDP may be higher than the potential GDP, leading to an inflationary gap. The inflationary gap is so termed because a country's economy tends to consume more when real GDP is relatively inflationary gap higher, which eventually drives up prices.
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