Economic stimulus is the use of monetary and fiscal policies by governments to boost their economy. These policies can include things like cutting interest rates and increasing government spending. This is typically done to combat a recession or other economic downturn.
The main purpose of economic stimulus is to get people to spend money which will increase demand for goods and services and help the economy recover. This is based on the Keynesian theory of how economies work and was popularized by John Maynard Keynes during the Great Depression. In more concrete terms, when the government lowers taxes it gives people more disposable income which they can then spend on something else in the economy. When businesses see more demand for their products they will hire more employees to produce those goods and services, thereby creating a virtuous cycle of growth.
Besides increasing government spending, other ways to stimulate an economy are by decreasing the interest rate which will make it easier for people to borrow and spend, or by scrapping regulations to encourage a certain industry to invest more. There are some critics of economic stimulus who argue that these policies may not be effective in the long run. This is a concern called crowding out. These critics believe that when the government participates in deficit forms of spending such as tax cuts, this will cause higher labor demands which will raise wages and hurt business profits. They also worry that deficits must be funded in the short term through debt which will lead to higher interest rates making it harder for businesses to obtain financing.
