The gap 'KT' represents the inflationary gap. This is the situation of excess demand.
Fiscal policy refers the policy that is undertaken by the government to influence the economy through the process of its expenditure and taxation. The fiscal measures to correct the excess demand are given as follows:

1. Government Expenditure: The Government of a country incurs various types of expenditure to enhance the welfare of the people and also to facilitate economic growth and development. In case of excess demand, the government cuts down its expenditures in form of disinvestment. This lowers the level of economic activity, which in turn, reduces the level of employment, thereby reducing the income level. This subsequently reduces the aggregate demand, thus, the situation of excess demand gets corrected.
2. Public Borrowings: Through the measure of public borrowings, the government affects the liquidity (cash balances) held by the public. It is because of the excess liquidity, the people demands more and vice - versa. Therefore, government affects the liquidity balances with the help of public borrowings.

In case of excess demand, the government raises the public borrowings, which reduces the liquidity balances with the public. A reduction in the liquidity lowers the purchasing power of the people, which in turn, lowers the aggregate demand.