CandleFocus Glossary Editor
Economic stimulus is a combination of fiscal and monetary policy intended to incentivize spending, investment and job creation by the private sector in order to maintain or increase levels of total aggregate demand in an economy. This forms part of Keynesian economics which states that increased government spending in certain situations increases the level of GDP and employment in an economy.
Fiscal policy stimulus tools are funded by government budget deficits and involve government spending or reduced taxation as a means of stimulating economic activity. Examples of fiscal stimulus can include infrastructure works such as roads, bridges, and railways; financial assistance for specific industries; tax breaks for businesses and individuals; and cash transfers to individuals.
Monetary policy stimulus tools are undertaken by the central bank and involve changes in the cost and availability of credit and the quantity of money in circulation. Examples of monetary stimulus tools include lowering interest rates, relaxing lending restrictions on banks, quantitative easing and implementing larger reserve requirement changes.
In the United States, large scale economic stimulus was used as a response to the global financial crisis of 2008 and the Great Recession that followed. This stimulus was intended to front load government spending and encourage investment, consumption and job creation. It is still controversial, however, as to how successful it was. Critics argue that it did not provide enough of an economic boost and may have caused long term economic damage.
Overall, economic stimulus is one of a number of tools available to governments when dealing with economic downturns. It is a controversial measure, however, with supporters arguing it can create jobs and kick start an economy while critics argue it can lead to longer-term economic damage.
Fiscal policy stimulus tools are funded by government budget deficits and involve government spending or reduced taxation as a means of stimulating economic activity. Examples of fiscal stimulus can include infrastructure works such as roads, bridges, and railways; financial assistance for specific industries; tax breaks for businesses and individuals; and cash transfers to individuals.
Monetary policy stimulus tools are undertaken by the central bank and involve changes in the cost and availability of credit and the quantity of money in circulation. Examples of monetary stimulus tools include lowering interest rates, relaxing lending restrictions on banks, quantitative easing and implementing larger reserve requirement changes.
In the United States, large scale economic stimulus was used as a response to the global financial crisis of 2008 and the Great Recession that followed. This stimulus was intended to front load government spending and encourage investment, consumption and job creation. It is still controversial, however, as to how successful it was. Critics argue that it did not provide enough of an economic boost and may have caused long term economic damage.
Overall, economic stimulus is one of a number of tools available to governments when dealing with economic downturns. It is a controversial measure, however, with supporters arguing it can create jobs and kick start an economy while critics argue it can lead to longer-term economic damage.