Question

How is Fiscal Policy used to correct excess demand? Discuss.

Answer 1

1. Reduce Government Spending:
   • The government cuts down on expenses (e.g., fewer infrastructure projects).
   • This reduces money flow in the economy, lowering demand.
2. Increase Taxes: 
   • Taxes on income and goods are raised.
   • People and businesses have less money to spend, which reduces overall demand.
3. Increase Budget Surplus: 
   • Government tries to earn more than it spends.
   • This helps absorb extra money from the economy.