How does fault handling and error management work in Apigee?

<!-- FaultRule: handle specific policy error -->
<ProxyEndpoint name="default">
  <FaultRules>
    <!-- Handle quota exceeded specifically -->
    <FaultRule name="QuotaExceeded">
      <Condition>fault.name = "QuotaExceeded"</Condition>
      <Step><Name>AM.QuotaExceededResponse</Name></Step>
    </FaultRule>
    <!-- Handle invalid API key -->
    <FaultRule name="InvalidApiKey">
      <Condition>fault.name = "InvalidApiKey"</Condition>
      <Step><Name>AM.UnauthorisedResponse</Name></Step>
    </FaultRule>
  </FaultRules>
  <!-- Catch-all for any unhandled fault -->
  <DefaultFaultRule name="DefaultFaultRule">
    <Step><Name>AM.GenericErrorResponse</Name></Step>
    <AlwaysEnforce>true</AlwaysEnforce>
  </DefaultFaultRule>
</ProxyEndpoint>

<!-- Custom error response policy -->
<AssignMessage name="AM.QuotaExceededResponse">
  <AssignTo createNew="true" type="response"/>
  <Set>
    <StatusCode>429</StatusCode>
    <ReasonPhrase>Too Many Requests</ReasonPhrase>
    <Headers><Header name="Content-Type">application/json</Header></Headers>
    <Payload contentType="application/json">{
      "error": "rate_limit_exceeded",
      "message": "You have exceeded your quota.",
      "retry_after": "3600"
    }</Payload>
  </Set>
</AssignMessage>

<!-- Key fault variables:
  fault.name      -- e.g. "QuotaExceeded", "InvalidApiKey"
  fault.type      -- "policy" or "messaging"
  error.message   -- the error message string -->