Economic stimulus is a series of government and central bank policies — known as fiscal and monetary policy, respectively — designed to kick-start the economy in times of trouble. Supporters of Keynesian economics claim that if demand in the private sector is lower than the economy’s potential output, then a fiscal stimulus strategy will fill this gap through a “multiplier effect.” Monetary policy measures like lowering interest rates or quantitative easing can also stimulate an economy by increasing money supply and liquidity in financial markets.
For example, during the COVID-19 pandemic in 2020, Congress passed a CARES Act that provided direct cash payments and forgivable loans to millions of Americans who needed assistance, as well as a ban on evictions and foreclosures. This provided much-needed money to those in need, which stimulated spending and helped reduce the number of people who were unemployed.
While some economists believe that a government-backed bailout of a failing business promotes irresponsible management practices and stops newer, more successful businesses from taking the place of struggling ones, most agree that if the economy isn’t performing to its full potential then an economic stimulus plan can help prevent or lessen the duration of a recession.
While the effects of economic stimulus can be felt across a broad range of industries, it’s important to understand that these strategies aren’t foolproof. In some cases, these large injections of funds can lead to inflation and a rise in prices that can be painful for consumers.
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