Stimulus Package
A stimulus package is a package of economic measures put together by a government to stimulate a floundering economy. The objective of a stimulus package is to reinvigorate the economy and prevent or reverse a recession by boosting employment and spending.
A stimulus package includes a number of incentives and tax rebates offered by a government to boost spending in a bid to pull a country out of a recession or to prevent an economic slowdown. A stimulus package can be in the form of either a monetary stimulus or a fiscal stimulus. Quantitative easing (QE) is another form of monetary stimulus.
A stimulus package is a package of economic measures put together by a government to stimulate a floundering economy. The objective of a stimulus package is to reinvigorate the economy and prevent or reverse a recession by boosting employment and spending.
A stimulus package includes a number of incentives and tax rebates offered by a government to boost spending in a bid to pull a country out of a recession or to prevent an economic slowdown. A stimulus package can be in the form of either a monetary stimulus or a fiscal stimulus. Quantitative easing (QE) is another form of monetary stimulus.
Monetary stimulus
A monetary stimulus involves cutting interest rates to stimulate the economy. When interest rates are cut, there is more incentive for people to borrow as the cost of borrowing is reduced.
An increase in borrowing means there’ll be more money in circulation, less incentive to save, and more incentive to spend. Lowering interest rates could also weaken the exchange rate of a country, thereby leading to a boost in exports. When exports are increased, more money enters the economy, encouraging spending and stirring up the economy.
Fiscal stimulus
When a government opts for a fiscal stimulus, it cuts taxes or increases its spending in a bid to revive the economy. When taxes are cut, people have more income at their disposal. An increase in disposable income means more spending in the country to boost economic growth. When the government increases its spending, it injects more money into the economy, which decreases the unemployment rate, increases spending, and eventually, counters the impact of a recession.
Quantitative easing
This is an expansionary monetary policy in which the central bank of a country purchases a large number of financial assets, such as bonds, from commercial banks and other financial institutions. The purchase of these assets in large amounts increases the excess reserves held by the financial institutions, facilitates lending, increases the money supply in circulation, drives up the price of bonds, lowers the yield, and lowers interest rates. A government will usually opt for quantitative easing when a conventional monetary stimulus is no longer effective.