Economic stimulus is government policy like spending, tax cuts or new lending creation that aims to increase aggregate demand. The aim is to counteract the downward spiral of recession that can be created when consumer demand drops. When consumers stop spending, companies stop producing goods and services, factories go idle, and workers lose their jobs.
The idea is that if the government acts as “spending of last resort” (to fill in the void left by falling consumer demand), businesses can stay open and keep producing, and workers can continue working and receiving income. To maximize its effect, a stimulus should be timely (to reduce the duration of the downturn) and targeted (to minimize the long-term impact on debt levels).
Fiscal stimulus can take many forms. Some involve increasing public investment in projects, such as building infrastructure. This is expected to increase the demand for materials and equipment used by the project’s workers, which in turn will lead to more spending by households. Other forms of fiscal stimulus are more direct in their effects on household consumption. For example, the first rounds of household stimulus payments were intended to provide support for families’ basic needs such as food purchases and rent. Some 85% of households received these payments, and up to 74% spent them. However, a greater percentage saved them or put them toward paying off debt.
Monetary stimulus is more straightforward than fiscal, and typically involves the central bank increasing the amount of money in the economy. This can be done by making loans cheaper or flooding the market with additional cash, typically through massive bond purchases.