In economic terms, which gap reflects a demand that exceeds supply leading to inflation?

The inflationary gap reflects a situation where the demand for goods and services exceeds the economy's ability to supply them at full employment output. This excess demand leads to upward pressure on prices, resulting in inflation. When consumers and businesses are willing to purchase more than what is available in the market, it creates a scenario where shortages appear, prompting sellers to raise prices. This condition typically arises when the economy operates above its potential output, often fueled by factors such as increased consumer spending, government expenditure, or investment.

In understanding the context of the other options, it's essential to differentiate them from the inflationary gap. A deflationary gap occurs when actual output is below the potential output, leading to unemployment and downward price pressures. An equilibrium gap would imply a balance between supply and demand, which does not lead to inflation. Meanwhile, a supply gap refers to the difference between what is demanded and what suppliers can provide, but it does not specifically denote a demand-driven scenario leading to inflation. Hence, the inflationary gap is the appropriate term to describe a situation where excess demand pushes prices higher, illustrating its role in economic analysis related to inflation.