What is an inflationary gap?

An inflationary gap happens when the economy is producing more goods and services than it can sustain, leading to higher prices, or inflation. This usually occurs when demand for products is much greater than what businesses can supply, causing them to raise prices. For example, if a lot of people suddenly want to buy new cars but there aren't enough cars available, car prices will increase. The economy is essentially "overheating," and while this might seem good because more people are working, it can create problems like inflation. To fix this, governments might need to slow down spending or raise interest rates to bring the economy back to a balanced state.