An inflationary gap, in economics, is the amount by which the actual gross domestic product (GDP) exceeds potential full-employment GDP. It is one type of output gap, the other being a recessionary gap. Overview The concept of the inflationary gap was first given by John Maynard Keynes in his work, How to Pay for War? (1940). In it, the concept was employed to study and solve problems regarding war finance. Keynes starts the analysis of the inflationary gap from the level of full employment equilibrium whereas his other analyses are based on under-employment equilibrium. Mechanism Let the full employment output be YF and the actual output that the economy is currently producing be Y. If the difference YF - Y is negative, the actual national income exceeds the potential national income, which is known as the inflationary gap. If this gap is positive, it is known as recessionary gap. The inflationary gap is always an ex-ante phenomenon; it is always expected to occur in the future. It arises when expected expenditure will not equal expected consumption at a future date. Keynes defines it as the excess demand in the market for consumption of goods and services. He defined an inflationary gap as an excess of planned expenditure over the available output at pre-inflation or base prices. Given a constant average propensity to save, rising: money incomes at full employment level would lead to an excess of demand over supply and to a consequent inflationary gap. Thus Keynes used the concept of the inflationary gap to show the main determinants that cause an inflationary rise of prices. When an initial increase in aggregate demand produces inflation (so called demand-pull inflation) and real GDP increase, the price level and real GDP are determined at the point where the new aggregate demand and the short-run aggregate supply meet. This point is known as above full-employment equilibrium, since the short-run aggregate supply is above the long-term aggregate supply, i.e. above the aggregate supply at full employment. The gap created between real GDP and potential GDP is the consequence of inflation, this is one of the reasons this type of gap is called an inflationary gap. Obviously, this situation cannot last forever, because there is a shortage of labour. The shortage of labour produces the rise of wage rates, which makes the short-run aggregate supply decrease, until it reaches the full-employment level. The short-run aggregate