Interaction between monetary and fiscal policies
Monetary and fiscal policies are two different ways of managing the economy. Monetary policy is run by the Central Bank, like the Federal Reserve in America, and involves controlling the interest rate and the money supply. Fiscal policy is run by governments and involves managing the taxes and spending levels.
When the Central Bank (monetary policy) increases the interest rate, it becomes more expensive for people to borrow money, which slows down the economy. On the other hand, when governments (fiscal policy) increase taxes, then people have less money to spend, which also slows down the economy.
When the economy is slowing down, the Central Bank and the governments need to work together to fix the problems. They can do this by either decreasing taxes (fiscal policy) or by decreasing interest rates (monetary policy)--ultimately so people have more money to spend, and the economy picks up again.
When the Central Bank (monetary policy) increases the interest rate, it becomes more expensive for people to borrow money, which slows down the economy. On the other hand, when governments (fiscal policy) increase taxes, then people have less money to spend, which also slows down the economy.
When the economy is slowing down, the Central Bank and the governments need to work together to fix the problems. They can do this by either decreasing taxes (fiscal policy) or by decreasing interest rates (monetary policy)--ultimately so people have more money to spend, and the economy picks up again.