The gap  by which aggregate demand exceeds the aggregate demand required to establish full employment equilibrium level is known as ___.

Inflationary gap

The correct answer is option (2) : Inflationary gap

An inflationary gap occurs when the aggregate demand in an economy exceeds the aggregate demand required to achieve full employment equilibrium. This situation leads to upward pressure on prices and potential inflationary pressures in the economy. Policymakers often use measures to reduce aggregate demand, such as tightening monetary policy or reducing government spending, to address inflationary gaps and stabilize the economy.

1. Deflationary Gap: A deflationary gap is the opposite of an inflationary gap. It occurs when actual aggregate demand is less than the aggregate demand required for full employment equilibrium. In a deflationary gap, there is insufficient demand in the economy, leading to underutilized resources, unemployment, and downward pressure on prices. To address this gap, policymakers often implement measures to stimulate demand, such as fiscal and monetary policies.

2. Excess Demand: Excess demand is a broader term that can be used to describe a situation where the quantity demanded for goods and services exceeds the quantity supplied at prevailing prices. This can occur for various reasons, including an increase in consumer or business spending, supply shortages, or other factors. Excess demand can lead to price increases and potential inflationary pressures.

3. Deficient Demand: Deficient demand is a situation where the quantity of goods and services demanded is insufficient to fully utilize the available resources and achieve full employment. It often results in an economic downturn or recession, with high unemployment and underutilized capacity. Policymakers may aim to stimulate demand to address this deficiency and promote economic growth.

In summary, the terms "deflationary gap," "excess demand," and "deficient demand" each describe specific economic situations related to the level of aggregate demand in an economy. An "inflationary gap" specifically refers to a situation where aggregate demand exceeds the level required for full employment and can lead to rising prices and inflationary pressures.