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What is the fiscal policy?

Fiscal policy is one of the government's essential tools that it utilizes to help stabilize the country's economy. The government can manage it either by modifying its expenditure or by adjusting the tax rates. If the government wants to pull out the economy from recession, it will increase spending or reduce taxes. If the government wants to cool the economy, it could reduce spending or increase taxes.

How can it be used to get the economy out of recession?

The government can increase aggregate demand with fiscal tools to bring the economy out of recession. The government can expand aggregate demand by reducing taxes, which increases people's non-refundable income and raises the consumption level in the economy, increasing the aggregate demand. Another way the government can persuade the aggregate demand is by increasing government disbursement, which also increases the aggregate demand and brings the economy out of recession. When government devoting increases, it increases the national income amount in the economy and influences aggregate demand.

How can it be used to get the economy out of the situation where the economy is in an expansionary period where we exceed long-run potential?

When the economy is in an expansionary position where the tangible income is more than the potential level, in the long run, it can decrease the level of aggregate demand, either by raising taxes or reducing government spending. The government can increase the taxes, which reduces non-refundable income, which reduces the consumption level and hence decreases the aggregate demand. Another way of decreasing the aggregate demand is by lowering the level of government expenditure in terms of investment and consumption, which reduces national income and, in turn, reduces aggregate demand.

Do both situations result on different impacts on inflation why or why not?

Yes, both situations will have a different influence on inflation. When aggregate demand increases, it increases prices, which increases inflation, and when aggregate demand decreases, it reduces prices, which decreases inflation.