The excess of Aggregate Demand above the level required to maintain equilibrium in full employment situation in an economy, is termed as inflationary gap. Inflationary gap causes inflation and increases price levels in an economy.
When there is involuntary unemployment in the economy, there is a short fall in Aggregate Demand from the level required to maintain a full employment equilibrium. This short fall is termed as deflationary gap. Such gap causes reduction in prices in the economy.