An economic stimulus refers to policies and actions undertaken by the government or central bank in a bid to boost economic growth and prevent or end a recession. It usually involves some form of financial incentive, such as tax cuts or infrastructure spending. It can also involve monetary policy changes like reducing interest rates or quantitative easing.
Many economists believe that economic stimulus can have positive knock-on effects across the economy by boosting consumer demand and business confidence. This in turn can stimulate job creation, unfreeze frozen credit markets and re-establish a normal level of output.
There are different ways to introduce economic stimulus, but the two main methods are through expansionary monetary policy and fiscal policy. Increasing production and consumption is the goal of both, but each has its own unique benefits and drawbacks.
Among the most popular types of fiscal stimulus are tax cuts, which increase disposable income and therefore cause people to spend more. This type of stimulus is more effective when it targets lower income earners rather than higher ones. The reason is that richer individuals tend to save the extra money they receive instead of spending it, whereas low income earners can spend more of their increased wealth.
However, it’s important to note that any stimulus plan should be timely, temporary and targeted. Otherwise, it could have the opposite effect and stifle economic growth. It should also be well-funded to avoid causing inflation, which can counteract any short-term gains by raising prices and making it more expensive to consume.