Economic stimulus is government-sponsored policies designed to encourage people and businesses to spend money in the hopes that the increased demand will kickstart broader economic activity. There are a variety of ways that governments can introduce stimulus measures, but the two most common methods are through monetary and fiscal policy. Monetary stimulus involves activities like lowering interest rates or engaging in quantitative easing, which increase the amount of fiat currency available for banks to lend and invest. Fiscal stimulus includes things like tax cuts or increases in government spending.
A key concern about these types of policies is that they may be ineffective or cause crowding out, which happens when higher government spending leads to a decrease in private sector spending. However, if a fiscal stimulus is introduced in a period of negative output gaps and excess savings, then it can be effective in increasing aggregate demand.
Fiscal stimuli can include things like lowering taxes or boosting spending on infrastructure projects. They can also be things like giving direct payments to low-income individuals or offering forgivable loans to small business owners. Many of these initiatives are popular amongst Keynesians and others who support the idea that reducing taxes or boosting spending is a way to fight recessions and avoid or prevent them. However, critics argue that these initiatives are often rushed and largely focused on short-term needs. They can also lead to a waste of taxpayer dollars or exacerbate inflation, which can hurt the economy in the long run by raising prices.