What is Inflationary Gap?

When aggregate demand exceeds aggregate supply, thus causing prices to increase if the economy is at full employment, or bringing about increases in production if it is not. 

It is usually attributed to government operating on deficit, thereby spending more than it receives in taxes and, so, creating excess demand.
INFLATIONARY GAP, KEYNESIAN MODEL:

An inflationary gap arises in the Keynesian model of the macroeconomy when the equilibrium level of aggregate production exceeds what could be produced at full employment. This represents the condition that arises when the economy is in a business-cycle expansion. Graphically, an inflationary gap is illustrated by the Keynesian cross if equilibrium aggregate production is to the right of full-employment aggregate production.

Keynesian Cross Equilibrium

Equilibrium

The exhibit to the right is a graphical representation of the basic Keynesian model, commonly termed the Keynesian cross. The "cross" term refers to the intersection between two lines, the red AE line and the black Y=AE line.

The vertical axis measures expenditures, specifically aggregate expenditures. The horizontal axis measures production, specifically aggregate production or gross domestic product. This exhibit indicates activity in the macroeconomic product markets, or the aggregate product market.

The intersection of the 45-degree line and AE line, which is $12 trillion in this exhibit, is equilibrium. At $12 trillion the aggregate expenditures on production is equal to aggregate production. All four sectors are able to purchase all of the output they want and all output produced is purchased by one of the four sectors. There is neither a surplus nor a shortage of aggregate production.