If the AD at a level of output is less than the full employment level, it is known as deficient demand. Deficient demand gives rise to a deflationary gap. (Fig. I)
If the AD at a level of output is more than the full employment level, it is known as excess demand. Excess demand gives rise to an inflationary gap. (Fig = II)
Diagrammatically,
Deflationary gap appears at full employment equilibrium to the magnitude of FG- fig(i) Inflationary gap appears after full employment level of income and employment is reached which is equal to FG as shown in figure(ii)
