Define Inflationary Gap.

When Aggregate Demand is higher than Aggregate Supply at full employment, the gap is called Inflationary Gap.

It is a situation of excess demand when aggregate demand exceeds aggregate supply at full employment level. In this situation Aggregate demand AD curve shifts upwards & thus there is a gap inflationary. Gap. This situation leads to inflationary tendencies or rise in prices. 

When in an economy aggregate demand exceeds “aggregate supply at full employment level”, the demand is said to be an excess demand and the gap is called inflationary gap.