Economic stimulus is a monetary and/or fiscal policy used by governments to energize an economy when it slows. Politicians aim to direct government deficit spending, tax cuts, lowered interest rates and/or new credit creation toward critical sectors of the economy in order to take advantage of powerful multiplier effects that will indirectly increase private-sector consumption and investment spending. This is a Keynesian approach to stimulating the economy that was first popularized by economist John Maynard Keynes during the Great Depression.
When a country is in trouble, the best way to stimulate its economy is by cutting taxes and increasing government spending. This increases disposable income for people which will make them more likely to spend money in a virtuous cycle of capitalism, creating jobs and demand for more goods. This can help to reduce unemployment and improve the overall economy and, ideally, prevent a recession from occurring altogether or at least reverse one that is already in progress.
Monetary stimuli can also be beneficial to the economy in the form of lower interest rates and the purchase of assets such as securities by central banks in a process known as quantitative easing. This increases the amount of money in circulation which can encourage people to borrow and spend more, thereby reviving lending and investing.
There are pros and cons to both types of economic stimulus, however. In the case of a central bank or monetary stimulus, it is possible to over-stimulate the economy by printing too much fiat currency, which can cause inflation (price rises) that can be painful for consumers. This can be countered to some extent by cutting interest rates.
About the Author
