Economic stimulus is a set of monetary and fiscal policies that a government implements to try to energize economic activity. It’s usually introduced in response to a recession and attempts to prompt a response from the private sector to reverse or prevent a slowdown.
Economic stimulion can include lowering taxes or boosting government spending. Typically, the aim is to stimulate consumer demand and encourage business investment.
Supporters of Keynesian economics believe that during a recession, demand falls far below sustainable levels. They also believe that lowering wages or cutting taxes will help increase demand and boost the economy. This is based on the theory that businesses will hire workers when demand is high enough and that consumers will spend more money when they have additional income.
Other forms of economic stimulus may include decreasing interest rates or quantitative easing (QE). QE involves central banks buying securities to increase the supply of money and revitalize lending and investing.
QE and interest rate cuts are often used together to achieve the desired effect. Increasing the supply of money can help lower the price of borrowing and reduce credit defaults, which can stimulate economic growth.
There’s a long history of governments implementing economic stimulus programs to fight recessions. President Roosevelt used economic stimulus in the 1930s to combat unemployment and national financial and business failures caused by the Great Depression. Critics of economic stimulus argue that the economy can recover on its own without intervention and that government involvement could lead to long-term debt and inflation.
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