INFLATIONARY GAP

Keynes demand pull inflation can be presented in the form of inflationary gap. In his pamphlet How to pay the War published in 1940, Keynes explained the concept of the inflationary gap. It refers to the excess of aggregate demand over the available output  at the full employment level. This gap will no longer be there if the goods are available in sufficient quantity at the existing level of prices.


                              

The inflationary gap arises on account of extra expenditure by the government. To remove inflationary gap, reduction of government expenditure is not desirable either during war or during the period of economic development. Inflationary gap can be bridged by
 
(i)  a rise in voluntary saving by the community to reduce the effective demand ;
(ii) using a tax system through a surplus budget to mop up the surplus purchasing power with the people, so as to reduce C+I by an amount equal to increase in the government expenditure.
(iii) increasing the availability of goods and services through imports or otherwise to absorb the excess demand, though there is little scope due to lack of unemployed resources.