A deflationary gap is an economic term that describes a situation where the Gross Domestic Product (GDP) is below its full-employment level, leading to unemployed resources and potentially falling prices (deflation).
Full employment is a rate of employment defined by government economists to take into account the percentage of unemployed individuals who would not be employed regardless of the nation's economy. It is currently considered to be at 5.2% unemployment.
An inflationary gap occurs when aggregate demand exceeds aggregate supply, causing price increases in a fully employed economy or production increases if the economy is not at full employment. This phenomenon is often attributed to government deficits and excess spending.
Neoclassical economics is a school of economic theory that flourished from about 1890 until the advent of Keynesian economics and asserts that market forces lead to efficient allocation of resources and full employment.
