Economic stimulus is when the government introduces policies that try to revive a weak economy in a bid to reverse or prevent a recession. It can include monetary and fiscal policies such as interest rate cuts, quantitative easing (QE), and tax rebates. The goal is to stimulate spending and boost the economy to protect jobs and consumers from an economic downturn. The term is typically used during times of financial crisis or economic slowdown. This is the type of economic policy that economists like John Maynard Keynes advocated for in his famous work, The Great Depression.
Keynesian economics suggests that a country during a recession needs government intervention to stimulate consumer spending and rekindle growth. This is because, according to his theory, demand is tied to past production so if there is a drop in income, people will stop buying things. The answer is to give them money in the form of reduced taxes or lower interest rates so they can borrow and spend it again, which will stimulate the economy.
Monetary stimulus is usually managed by a central bank and includes lowering interest rates to increase the availability of credit. This can help businesses and households take on more debt and encourage more spending, but the risk is that it will lead to higher inflation or even defaults if interest rates rise. Fiscal stimulus, on the other hand, is more flexible and focuses on increasing government spending or cutting taxes, which can directly increase consumption and investments in the private sector. One example of fiscal stimulus is the popular Cash for Clunkers program in 2009 which incentivized consumers to buy more fuel-efficient vehicles.