When the economy experiences a slowdown, central governments use various fiscal and monetary policy tools to re-energize economic growth. These tools include lowering taxes, increasing spending and providing other financial relief to a sector of the economy or the overall economy. The goal is to get more money in the hands of consumers and businesses so they can re-energize spending, which should boost the economy out of a recession or depression.
The most common type of economic stimulus is a fiscal package created through legislation. This can involve lowering taxes, reducing interest rates or implementing infrastructure projects. It is most effective when it targets lower income earners as they are more likely to spend a larger percentage of their additional funds. For example, if Congress cuts taxes for the wealthiest Americans, they might only spend a small amount of their additional money. If, however, Congress reduces taxes for low-income earners, they may spend a greater amount of their additional funds which would then create a multiplier effect that would help to jumpstart the economy.
Other types of economic stimulus can include a central bank’s quantitative easing strategy. This involves the Federal Reserve purchasing longer-term bonds to increase the amount of money in circulation and stimulate growth. This approach is controversial because many economists believe that the economy should correct itself over time, without government intervention. Critics also argue that these initiatives can lead to long-term debt and inflation, if not carefully managed.
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