What are Fiscal and Monetary policies ?

Fiscal and Monetary policies are the tools used by the  Government and the central bank of a country to influence the pace of the economic growth, i.e. to slowdown an overheated economy and to give a boost to a slowing economy. Goverments of overheated economies mostly  run a  fiscal deficit due to large spending by the government on big ticket projects.  The following fiscal policy changes can be made by the govt to slowdown an overheated economy and cut down on its fiscal deficit :

• Cut its spending on big ticket projects .  This will inturn leave less money in the hands of companies and inturn with individuals. People will cut on spending which will inturn reduce the overall demand in travel,tourism,food products,luxury items etc. This will lead to a cooling of the economy. 
• Increase taxes,which will have the same effect as above. But most goverments dont take this approach in fear of losing popularity.
• Automatic fiscal policies. For example , a person losing his job would take up an unemployment insurance, bringing aditional revenue for the govt.     

The central bank (US Fed) manages the monetary policies.  It does it thorugh one or more of the following ways:

• Increase the Cash reserve ratio (CRR) . CRR is the amount of funds that a bank has to place with the central bank . Increase in the CRR will drain out the excess money from banks, whcih will slow down leanding and slow down an over heated economy.
• Increase the Repo rate and reverse repo rate. Repo rate is the rate at which banks can borrow from the central bank. Reverse repo rate is the rate the central bank offers to banks depositing money with it. Increasing these two rates will encourage banks to lend less and park their money with the  central bank.
• The central bank can buy bonds isued by the government. When it does so, it  places money into the hands of the government which can be used for public spending.

The main reason why a government wants to slow down an overheated economy would be the inflation. As an economy grows, so does the inflation. And higher inflation means rising costs which if not controlled can spin out of control .  Too much tightening can cause considerably slowdown the economy, which may discourage further investments and FDIs in that country. So the govt and the central bank have to tread carefully while using the fiscal and monetary policies as tools to  influence the pace of an economy.