Measures to remove deflationary gap: 1. Sub sides should be provided decrease taxes, the consumption expenditure will increase. As a result, aggregate demand will also increase. 2. There would be an encouragement of investment by providing incentives and facilities to the investors and provide tax concessions. The aggregate demand will increase due to increase in investment. 3. Government should increase its expenditure by adopting the policy of defect financing, issuing new currency notes, gaining internal and external aid. In this way, the aggregate demand will also increase. Limitation of Fiscal Policy: 1. The Displeasure of the people is incurred if government increases taxes for curbing inflation in the country. Because the government cannot bear the political pressure in a democratic country. 2. Once tax rate is increased, it is difficult to come back at the old rate of taxes. 3. The state may not raise the taxes in order to please the people during unrest in the country. 4. The government may not be able to improve deflationary situation in a short period due to some procedural difficulties i.e. Plans preparation, land is to be acquired, purchasing of material etc. 5. If the private expenditure incurred on conception and investment move in the opposite direction, the state may not be in a position to control inflationary of deflationary situation. 6. The policy may fail in creating employment due to immobility of labor force. 7. The public spending may increase the difficulties of private investors by raising the cost of construction materials, building labor etc. 8. The people may oppose surplus budged during the period of prosperity and may demand tax reductions.
