An inflationary gap occurs when actual unemployment is higher than the natural rate, leading to lower inflation rates.

An inflationary gap happens when the economy is producing more than what is sustainable, causing actual unemployment to be lower than the natural rate. The natural rate of unemployment is the level of unemployment that exists when the economy is healthy and balanced, typically including people who are in between jobs. When actual unemployment is lower than this natural rate, it can lead to increased demand for goods and services, pushing prices up, which typically causes higher inflation, not lower. For example, if a factory is operating at full capacity and hiring more workers than usual, it may lead to higher wages and prices, creating inflation. Therefore, an inflationary gap is characterized by high demand and low unemployment, which can result in rising inflation rates, not lower ones.