An increase in the expenditures in an economy causes the income level to rise. This will take place in real terms up to full employment level and in nominal terms after full employment level. Once the economy reaches potential or full employment income level (Yp), it is not possible to increase production in the economy. If expenditures still go on to increase, only the nominal income may increase. Since the nominal income is the multiplication of price level and production amount, price level will increase as far as production amount stays constant. This situation is called as inflationary gap.