Brief description: An inflationary gap results when the level of aggregate demand is above the level required for full employment. This excess demand will tend to increase the price level, causing inflation.

Detailed description: On this Keynesian 45 degree line diagram, the inflationary gap is given by the distance AB. The full employment level of output is Yfe and this would be the equilibrium if aggregate demand was AD2. However, with aggregate demand at AD1 there is excess demand and equilibrium is at Ye. This will cause inflation.