Economic stimulus refers to a combination of fiscal and monetary policies that a government puts in place with the goal of reviving an economy. Specifically, an economic stimulus refers to the use of government spending and tax cuts to encourage private sector growth. It’s typically used to combat a recession or other economic downturn, and it can also be implemented to prevent or reverse a slowdown.
The main idea behind an economic stimulus is that when consumer confidence dwindles, people may hold off on buying products or services. The purpose of an economic stimulus is to jumpstart consumer spending and get the economy moving again. As a result, the hope is that economic stimulus will encourage companies to produce more goods and hire workers, triggering the virtuous cycle of capitalism.
An economic stimulus can take many forms, from lowering interest rates to cutting taxes. When the Federal Reserve, for example, reduces interest rates, it makes it cheaper for banks to loan money out to consumers. This increases the money supply and revitalizes lending and investing, which stimulates the economy. Likewise, when taxes are cut, individuals have more disposable income. They’re more likely to spend that money, which again stimulates the economy.
However, critics point to the potential risks of economic stimulus. For one, increased consumer demand tends to raise wages, which can hurt companies that rely on low labor costs. Additionally, if businesses receive tax cuts, they may save that money instead of spending it, resulting in what’s called “crowding out.”
