Due to the deficiency in the aggregate demand, there exists a difference (or gap) between the actual level of aggregate demand and full employment level of demand. This difference is termed as deflationary gap. This gap measures the amount of deficiency in the level of aggregate demand. Graphically, it is represented by the vertical distance between the aggregate demand at the full employment level of output (ADE) and the actual level of aggregate demand (ADf). In the figure below, EY denotes the aggregate demand at full employment level of output and CY denotes the actual aggregate demand. The vertical distance between these two represents deflationary gap. That is, EY−CY=EC (Deflationary Gap)
Let us understand the situation of deficit demand and concept of deflationary gap with the help of the following figure.

In the figure, AD1 and AS represents the aggregate demand curve and aggregate supply curve. The economy is at full employment equilibrium at point ' E ', where AD1 intersects AS curve. At this equilibrium point, OY represents the full employment level of output and EY is the aggregate demand at the full employment level of output.
Let us suppose that the actual aggregate demand for output is only CY, which is lower than EY. This implies that actual aggregate output demanded by the economy CY falls short of the potential (full employment) aggregate output EY. Thus, the economy is facing a deficiency in demand. This situation is termed as deficit demand. As a result of the deficit demand, deflationary gap arises. The deflationary gap is measured by the vertical distance between the potential (or full employment level) aggregate demand and the actual aggregate demand for output. In other words, the distance between EY and CY, i.e. EC represents the deflationary gap.
To correct deflationary gap, the central bank purchases the securities in the market, thereby, increasing the flow of money and subsequently enhancing the purchasing power of the people. The higher purchasing power increases the aggregate demand.