The extent to which current Aggregate Demand becomes higher than the Aggregate Demand required for full employment, it is termed as inflationary gap. Figure showing inflationary gap:
In this figure, full employment equilibrium struck at point E. If the level of demand increases to {{AD}_{1}}
it is in excess of what is required to maintain full employment. This causes inflation. Inflationary Gap = EF (the difference between AD and {{AD}_{1}}).