Economic Stimulus Package

What is the Economic Stimulus Package?

An economic stimulus package is an attempt by the central government of any nation to stabilize the economy through monetary and fiscal policy expansion. It attempts to avert the economic slowdown and get the economy out of recession by encouraging private sectors to get back on their feet, eventually leading to economic growth.

Explanation

Most of the stimulus package measures refer to the targeted measures in monetary or fiscal policy to upscale the private sector. In a way, the package attempts to lift the demand and put the private sector back on track, which is a very conservative and orthodox approach.

When the economy hits recessionRecessionEconomic recession is when economic activity is stagnant, and there is contraction in the business cycle, over-supply of goods compared to its demand, and a higher unemployment rate resulting in lower household savings and lower expense, inflation, higher interest rate and economic crisis due to higher fiscal deficit.read more, which is the stage where demand drops and the economy might not have the caliber to self-correct and stand on its own, the government has to intervene and make things work in a favorable direction. Like, in recession, the economy has a high unemployment rateUnemployment RateThe unemployment rate formula calculates the share of people who are not working or are jobless of the total employed or unemployed labour force and is depicted as a percentage. Unemployment Rate = Unemployed People / Labor Force * 100 read more, lower output, and slow growth rates where the stimulus package might help the economy get back on track with different measures it uses to stabilize the economy.

In terms of fiscal policy, the government attempts to stimulate the economy by giving the citizens’ tax cuts, which eventually leaves them with more disposable incomeDisposable IncomeDisposable income is an important mechanism to measure household incomes, and includes all sorts of income such as wages and salaries, retirement income, investment gains. In other words, it is the amount of money left after paying off all the direct taxes.read more to spend. This will increase their purchasing power and increased spending on goods and services. On the other hand, government expenditure increases, which signifies the injection of liquidityLiquidityLiquidity shows the ease of converting the assets or the securities of the company into the cash. Liquidity is the ability of the firm to pay off the current liabilities with the current assets it possesses.read more in the market.

When the government tries to use monetary policy, they might reduce interest rates, which will increase the liquidity in the market, where consumer spending capacity will increase, and investment avenues also open up. Lower interest rates mean a low cost of borrowing and a reduction in the exchange rate, boosting export for the country.

Economic Stimulus Package

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Purpose

  • The stimulus package’s primary approach is to save the economy from reaching new lows in unemployment, growth rates, and aggregate demandAggregate DemandAggregate Demand is the overall demand for all the goods and the services in a country and is expressed as the total amount of money which is exchanged for such goods and services. It is a relationship between all the things which are bought within the country with their prices.read more. The package, with its measures, tries to drive the economy towards stabilization and recovery.
  • When a recession hits the economy, it might not recover on its own, and some intervention is required at the central level for different sectors in the economy, which can help raise the curve and minimize the economic damage.
  • As per the Keynesian theory, it is always advisable to live up private sectors in the economy, leading to more spending in that sector and generating more employment, which will help lift the aggregate demand and lower the unemployment figures. The government generally resorts to expansionary fiscal policy, which also targets increased business investment spending and full employment.
  • Another important purpose of the economic stimulus package is to target specific sectors in the economy, where government spending, tax cuts, and low-interest rates are all directed towards the economy’s key sectors to take advantage of the multiplier effect and which will eventually increase private-sector consumption.
  • The government tries to take advantage of this relief package and tries to stabilize its account as well, so in fiscal stimulus, when it is giving tax cuts, it targets the lower-income belt rather than wealthy individuals as the lower-income belt will spend more from the saved tax income as compared to the wealthy individuals so that the government can take advantage of the multiplier effect.

How does it Work?

  • The government initially tries to identify the suppressed sectors being affected by the slowdown or recession, which has a larger impact on the economic output.
  • Post recognizing the sectors, the government designs a stimulus package that will help the depressed sectors stabilize their survival in the market.
  • The mediums to reach those sectors are monetary or fiscal policy measures; generally, the government in these times opt for expansionary policy measures targeting the key rates from both the policies.
  • In this way, directly or indirectly government tries to pass on the leverage or benefits to the desired sectors, for instance, in terms of low-interest rates on loans, tax cuts, or relaxation of certain policies to boost growth.

Examples

The classic example is the 2009 US Economic stimulus package given by congress to the US citizens to save the economy from entering the great depression. The package’s initial phase increased government spending in the selected sectors like infrastructure, healthcare, education, and renewable energy. Some of the other measures also included tax cuts and unemployment assistance.

The package’s total value accounted for $831 billion spanned for a period of 10 years, which concentrated more on public spending to get jobs and reduce further economic deterioration. The package also aimed to give aid to low-income workers, unemployed, and retirees to make them job-ready, which included job training.

Impact of Economic Stimulus Package

The impact of these kinds of packages are long term and can be seen in the span of more than 5 years. Post the package, the economy goes into the healing stage, and slowly the implemented measures start to yield positive results. In 2009 the US implemented the package to reduce unemployment; however, it was not before 2014 US started to see lower unemployment figures.

Another major impact is that at least the package puts a halt from further damaging the economy. By infusing funds and liquidity in the required sectors, the initial motive would be to stop further damage and then start to recover.

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