What is Economic Stimulus?

Economic stimulus refers to a series of government policies, often referred to as fiscal and monetary policy, designed to jump-start the economy during a period of slow or stagnant growth. This type of policy is usually implemented by central governments in order to avoid a recession and spur the economy back to growth. The economic policy tools used by the government for these purposes include taxes and spending.

The economic theory behind these policies is based on the work of economist John Maynard Keynes. He developed his theories during the Great Depression of the 1930s and argued that during periods of slow or no economic growth, businesses need to increase demand by giving people more money to spend. This will, in turn, lead to more employment, which in turn will drive revenue for retailers and manufacturers. This is referred to as the virtuous cycle of capitalism.

To increase demand, the Government may lower taxes, boost its own spending or engage in quantitative easing (QE). These strategies are designed to stimulate growth and bring the economy out of a slump or recession. However, these types of programs are not without controversy as they can lead to a rise in inflation. Critics point out that a government may be less efficient at capital allocation when spending large amounts of money and can potentially print too much fiat currency which leads to price increases. However, others argue that the economy can only recover from a collapse when it is given a push in the right direction.