Fiscal policy involves the government changing tax and spending levels in order to influence the level of Aggregate Demand. To reduce inflationary pressures the government can increase tax and reduce government spending.

The two main components of fiscal policy are government revenue and government expenditure. In fiscal policy, the government controls inflation either by reducing private spending or by decreasing government expenditure, or by using both. It reduces private spending by increasing taxes on private businesses.

Budget Surplus: A budget surplus occurs when government revenues exceed expenditures. This can help control inflation by reducing the amount of money circulating in the economy, thereby decreasing demand and helping to stabilize prices. Thus, a budget surplus is a direct fiscal policy tool to help control inflation