how do fiscal and monetary policy work together
Interaction between monetary and fiscal policies Fiscal policy and monetary policy are the two tools used by the state to achieve its macroeconomic objectives. While for many countries the main objective of fiscal policy is to increase the aggregate output of the economy, the main objective of the monetary policies is to control the interest and inflation rates. The IS/LM model is one of the models used to depict the effect of policy interactions on aggregate output and interest rates. The fiscal policies have a direct impact on the goods market and the monetary policies have a direct impact on the asset markets; since the two markets are connected to each other via the two macrovariables output and interest rates, the policies interact while influencing output and interest rates.
Balanced budget Mainstream economics mainly advocates a cyclic balanced budget, arguing from the perspective of Keynesian economics that permitting the deficit to vary provides the economy with an automatic stabilizerâ€”budget deficits provide fiscal stimulus in lean times, while budget surpluses provide restraint in boom times. Keynesian economics does not advocate for fiscal stimulus when the existing government debt is already significant.