An inflationary gap (positive output gap) occurs when an economy's short-run equilibrium output exceeds full-employment output, so the AD-SRAS intersection sits to the right of LRAS, unemployment falls below the natural rate, and the price level faces upward pressure (EK MOD-2.G.3).
An inflationary gap exists when actual real GDP is higher than potential (full-employment) GDP. On the AD-AS graph, that means the AD and SRAS curves intersect to the right of the LRAS curve. The CED calls this a positive output gap (EK MOD-2.G.3), and per EK MEA-2.A.4, the output gap is just actual output minus potential output. Positive gap, inflationary pressure.
Here's the intuition. Potential output is the level of GDP where unemployment equals the natural rate. An inflationary gap means the economy is producing more than that, which sounds great but isn't sustainable. Unemployment drops below the natural rate, workers are scarce, and firms bid up wages and prices to compete for them. The economy is running hot, like an engine redlining. It can do it for a while, but something has to give, and that something is the price level.
The inflationary gap is one of the two states of disequilibrium (along with the recessionary gap) that the entire policy half of AP Macro is built around. It first shows up in Topic 2.7 as a positive output gap in the business cycle (LO 2.7.A), gets its formal AD-AS graph in Topic 3.5 (LO 3.5.A and EK MOD-2.G.3), and then becomes the trigger for everything that follows. Topic 3.7 (LO 3.7.A) asks how the economy fixes the gap on its own through flexible wages and prices. Topic 3.8 (EK POL-1.A.5) asks how contractionary fiscal policy closes it deliberately. Topic 4.6 asks the same question for contractionary monetary policy. If you can't identify an inflationary gap on a graph, you can't answer any of those questions, which is why it anchors FRQ prompts like 2026 Q1.
Keep studying AP Macroeconomics Unit 5
Long-Run Self-Adjustment (Unit 3)
This is the 'do nothing' answer to an inflationary gap. Tight labor markets push nominal wages up, which raises production costs and shifts SRAS left until output falls back to potential at a higher price level (EK MOD-2.I.1). The gap closes itself, but the price level ends up permanently higher.
Recessionary Gap / Output Gaps in the Business Cycle (Unit 2)
The inflationary gap is the mirror image of the recessionary gap. Both are defined by EK MEA-2.A.4 as the difference between actual and potential output. Inflationary means actual is above potential and unemployment is below the natural rate; recessionary flips both.
Contractionary Fiscal and Monetary Policy (Units 3-4)
An inflationary gap is the textbook signal for contractionary policy. The government can cut spending or raise taxes (EK POL-1.A.5), or the Fed can sell securities and raise interest rates (LO 4.6.A). Either way, AD shifts left back toward LRAS. Just remember both policies face lags (EK POL-1.B.1, EK POL-1.E.1), so the gap may shrink on its own before the medicine kicks in.
Demand-Pull Inflation (Units 3 & 5)
Demand-pull inflation is what an inflationary gap produces. Too much spending chasing the economy's limited capacity pulls the price level up. Unit 5 adds the long-run punchline through the quantity theory of money. If the money supply keeps growing too fast at full employment, you get inflation, not more real output (EK POL-3.A.2).
This term shows up everywhere graphs and policy meet. The 2026 FRQ Q1 opens by telling you the economy of Micanapy 'is experiencing an inflationary gap' and asks you to draw a correctly labeled AD-AS graph. That means three curves (AD, SRAS, LRAS), equilibrium output labeled to the right of LRAS, and both axes labeled (price level, real GDP). Putting equilibrium on the wrong side of LRAS costs you the point. MCQs test three moves with this term. First, identification, recognizing that output above potential with unemployment below the natural rate means an inflationary gap. Second, the policy response, like tracing the transmission mechanism when the Fed sells securities during an inflationary gap (Fed sells bonds, money supply falls, interest rates rise, investment falls, AD shifts left). Third, the no-policy scenario, where you have to explain that nominal wages rise and SRAS shifts left to restore long-run equilibrium. Practice all three directions, because the exam rotates among them.
Both are output gaps, but they point in opposite directions. An inflationary gap means actual output is ABOVE potential, unemployment is below the natural rate, and the fix is contractionary policy (or SRAS shifting left on its own as wages rise). A recessionary gap means actual output is BELOW potential, unemployment exceeds the natural rate, and the fix is expansionary policy (or SRAS shifting right as wages fall). Quick graph check that never fails. If the AD-SRAS intersection is right of LRAS, it's inflationary; left of LRAS, it's recessionary.
An inflationary gap is a positive output gap, meaning actual real GDP exceeds potential (full-employment) GDP, per EK MOD-2.G.3 and EK MEA-2.A.4.
On the AD-AS graph, an inflationary gap shows the AD-SRAS intersection to the right of the LRAS curve, with current output labeled above full-employment output.
During an inflationary gap, unemployment is below the natural rate, which creates upward pressure on wages and the price level.
Without policy action, the gap self-corrects in the long run because rising nominal wages shift SRAS left, returning output to potential at a higher price level (EK MOD-2.I.1).
Contractionary fiscal policy (cut spending, raise taxes) or contractionary monetary policy (sell bonds, raise rates) closes an inflationary gap by shifting AD left.
Inflationary gaps cause demand-pull inflation; in the long run, sustained inflation is driven by money supply growth, not output, per the quantity theory of money (EK POL-3.A.1-3).
An inflationary gap is a positive output gap where actual real GDP exceeds potential GDP. On the AD-AS graph, the AD and SRAS curves intersect to the right of LRAS, and unemployment sits below the natural rate, pushing prices upward (EK MOD-2.G.3).
An inflationary gap means output is above potential and unemployment is below the natural rate; a recessionary gap means output is below potential and unemployment is above the natural rate. On the graph, inflationary puts equilibrium right of LRAS, recessionary puts it left.
No. Output above potential isn't sustainable. The tight labor market drives up wages and prices, and the long-run adjustment shifts SRAS left, leaving you with the same potential output but a permanently higher price level. The 'extra' output disappears; the inflation sticks.
It uses contractionary monetary policy. A classic exam sequence is the Fed sells government securities, the money supply falls, interest rates rise, investment and interest-sensitive consumption fall, and AD shifts left back toward full employment (LO 4.6.A).
Through flexible wages and prices (EK MOD-2.I.1). With unemployment below the natural rate, firms compete for scarce workers, nominal wages rise, production costs increase, and SRAS shifts left until output returns to potential at a higher price level.