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Definition

The government of a country can stimulate its economy in two primary ways - through monetary policy (mostly by reducing the repo rate) of fiscal policy. Fiscal stimulation means decreasing taxes or increasing government expenditure. Either of these actions by the government will have the effect of stimulating the economy - depending on how they are financed. For example, there is little stimulation to be had from increasing government spending by undertaking a big construction project, if that project is paid for by increasing taxes. The important thing about fiscal and monetary stimulation of the economy is that they must be co-ordinated. If fiscal policy is stimulatory but monetary policy is operating in the opposite direction the result can be inflationary. Ideally they should work together to have the best effect.

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