What is fiscal Policy?

It is mainly based on the ideas of British economist Jones Maynard

Keynes.
Fiscal Policies are those policies that affect economic conditions
through changes in tax policies and government spending. It includes
aggregate demand for goods, inflation, employment, and economic
growth.
In order to boost demand and the economy during a recession, the
government may reduce tax rates or increase spending. Likewise, in
inflation, the government increases the tax rate or decreases spending
to discourage demand.

Types of Fiscal Policy

1. Expansionary policy and tools- It is usually described by
deficit spending. It happens when government spending
exceeds government revenues from taxes and other
sources. This occurs due to tax cuts and increases in
spending by the Government. This strategy is justified by the
idea that when people pay less in taxes, they have more
money for spending or investing, which increases demand.
Due to the increased demand, businesses increase hiring,
which reduces unemployment and intensifies labor market
competitiveness. In turn, this helps to increase salaries and
give customers more money to spend and put away. It's a
constructive feedback loop or virtuous cycle.
 2. Contractionary policy and tools- This tool is used at a time
when the economy is facing mounting inflation. It is
characterized by a Budget surplus. At the time of Inflation,
the purchasing power of people increases as they will be
getting increased salaries due to the fact that the economy
will be working at a higher level from potential economic
equilibrium leading to an increase in aggregate demand
which will result in increasing the price. To curb the
Increasing prices due to high Inflation government increases
the tax rates and decreases spending and also by cutting
public sector salaries or jobs.

What is Monetary Policies?

This policy or tool is used by the Central bank to control the overall
money supply in an economy, promote sustainable economic growth
and employ strategies like increasing or decreasing the tax rates and
changing the cash reserves.
Monetary policy strategy is influenced by economic indicators including
the GDP, inflation rate, industry and specific growth rates.

Tools of Monetary policies

There are two monetary tools which are qualitative and quantitative. It
plays a major role in controlling money supply in an economy
a) Qualitative measures- These focuses more on the quality of the
money supply. By using this tool, banks regulate the allocation of
money supply and decide how much money supply sector-wise
will get.
There are the following tools under this-
1. Rationing of credit- The RBI sets a credit limit that must be met
by commercial banks. Limiting the amount accessible for each
commercial bank provides credit
2. Regulation of Consumer Credit- Through the installment of
sales and purchases of consumer items, this tool controls the
flow of credit to consumers. Here, terms like as down payment,
loan term, and installment amount are all predetermined,
which aids in controlling the nation's credit and inflation.
3. Moral suasion- Moral persuasion is the term used to describe
the RBI's recommendations to commercial banks that aid in
limiting credit during an inflationary time. For banks to reduce
credit supply, the RBI may provide directions, guidelines, or
proposals.
4. Changes in marginal requirement on security loans- The term
"margin" refers to a specific fraction of the loan amount that
 the bank does not offer or fund. The loan size may fluctuate if
the marginal changes. This tool is utilized to promote credit
supply for sectors that need it and restrain it for those that
don't. If the RBI decides that the agricultural sector deserves a
larger share of the credit supply, it will lower the margin and
allow as much as 80–90% of the loan to be allocated.

Quantitative Measure- It focuses on the quantity of

money supply in an economy. These tools are indirect in
nature. Tools that help in this are-
a) Bank rate – the interest rate at which the Reserve
Bank of India extends long-term loans to commercial
banks. It influences the lending rate of Commercial
banks.
b)Legal reserve ratios- Commercial banks are required
to maintain a set level of cash reserves as reserve
assets. These cash reserves make up a fraction of
their overall assets in cash. The RBI also maintains a
fixed level of cash reserves in order to preserve
liquidity and regulate credit in the economy. There
are two reserve ratios Statutory Liquidity Ratio and
Cash Reserve Ratio.
c) Open market operations- These refer to the long-
and short-term sales and purchases of securities by
 the Reserve Bank of India in the money market. This
is a well-liked tool of RBI monetary policy.
d)Liquidity adjustment facility- Here liquidity of
commercial banks is adjusted. It has two
mechanisms and they are-
1)Repo rate- it is the interest rate at which RBI
provides overnight liquidity against the collateral
of government security to Commercial banks.
2)Reverse Repo rate- It is the interest rate at
which a Commercial bank extends money to RBI.
RBI borrows to control the excessive liquidity in a
market. The commercial bank lends money
against government securities.