If aggregate demand exceeds aggregate supply at full employment level…

If aggregate demand exceeds aggregate supply at full employment level, the gap which occurs is known as __________.

Answer & explanation

Correct answer: option 4

The correct answer is Option (4) → Inflationary gap

Note 1: The given answer is as per the official NTA Answer Key. For this question, Option (2) could also be a possible answer, as explained below.

At full employment, the economy is producing all it can with the resources it has. If aggregate demand (AD), the total planned spending, is more than this output, the extra demand cannot be met by producing more. It only pushes prices up. The amount by which AD exceeds aggregate supply (AS) at full employment is called the inflationary gap.

Option (1) Deflationary gap — Incorrect. This is the amount by which AD falls short of AS at full employment. Demand is then too low, and prices tend to fall.
Option (2) Excess demand — Should also be correct, though not the answer given by NTA. Excess demand is the situation in which AD is more than AS at full employment. It leads to a rise in prices. Read as the excess of AD over AS, it is the very gap the question describes.
Option (3) Excess supply — Incorrect. Here AS is more than AD, the opposite case.
Option (4) Inflationary gap — Correct. The gap gets its name because it pulls the price level up.

Note 2: The terms ‘inflationary gap’ and ‘deflationary gap’ are not in any NCERT book (2026-27, 2025-26, 2023-24 or pre-rationalised). The books use the term excess demand for the situation in which AD is more than AS at full employment. They say that it leads to a rise in prices. Inflationary gap is the usual name for the size of this excess. Deflationary gap is the usual name for the shortfall when AD is less than AS at full employment.

Note 3: A same/similar question was asked in CUET (UG) in the papers below.

2026	2025	2024	2023	2022
–	–	–	08-06 S1* 02-07 S3	–

* A similar question.

NCERT (2026-27): “4.4 Some More Concepts …Full employment level of income is that level of income where all the factors of production are fully employed in the production process. Recall that equilibrium attained at the point of equality of Y and AD by itself does not signify full employment of resources. Equilibrium only means that if left to itself the level of income in the economy will not change even when there is unemployment in the economy. The equilibrium level of output may be more or less than the full employment level of output. If it is less than the full employment of output, it is due to the fact that demand is not enough to employ all factors of production. This situation is called the situation of deficient demand. It leads to decline in prices in the long run. On the other hand, if the equilibrium level of output is more than the full employment level, it is due to the fact that the demand is more than the level of output produced at full employment level. This situation is called the situation of excess demand. It leads to rise in prices in the long run.”