In economics, Economic stimulus is a combination of fiscal and monetary policy that a government employs in the hope of energizing private sector economic activity. It may take the form of deficit spending or lowering taxes. Economists use it to replace lost demand during a recession, which can lead to lower production and job losses.
The economic stimulus bill passed by Congress in February 2009 included new Federal government spending on things like infrastructure and health, education and unemployment assistance as well as tax cuts. It is based on the theory of Keynesians, who believe that economic stimulus can combat recessions by increasing aggregate demand and creating jobs.
For example, when the Federal Reserve engages in quantitative easing it buys securities on the market to increase the money supply, which revitalizes lending and investing. In this way, it increases demand for goods and services, which in turn leads to more hiring in the economy. This creates a cycle of growth that can offset the effects of a recession.
Despite their effectiveness in countering recessions, many economists dispute whether economic stimulus plans have long-term benefits. Some say they delay or prevent a private-sector recovery from the real cause of a downturn, while others claim that they can do more harm than good in the long run, by increasing national debt and possibly leading to inflation. Regardless, the debate continues about how best to stimulate the economy for sustainable growth.