Question

How does change in taxes help to control the situation of excess and deficient demand?

Answer 1

If the government increase the taxes then the real income of the consumers will fall. As a result, aggregate demand, purchasing power, money supply will fall which are necessary to control the situation of excess demand.

Whereas, during the deficient demand the taxes are reduced by the government. As a result, aggregate demand, purchasing power and money supply will rise which are necessary to combat deficient demand.