Excess demand refers to a situation in which Aggregate Demand exceeds Aggregate Supply corresponding to full employment level.
The two fiscal measures to reduce excess demand are:
(i) Surplus budget policy It is necessary that government’s expenditure should be less than its income, in order to correct the situation of excess demand.
(ii) Increase in taxes The government should levy new taxes and enhance the rate of the existing ones. This will reduce disposable income of the people and hence, lead to reduction in Aggregate Demand.