Economic Stimulus Package
Definition Economic Stimulus Package.
An Economic Stimulus package is an attempt by the government to boost economic growth and lead the economy out of a recession or economic slowdown. The two main ways for stimulating the economy are expansionary monetary policy and expansionary fiscal policy.
This involves a change in spending or taxation in order to influence aggregate demand. Fiscal policy could involve
- Tax Cuts. Cutting income taxes increases disposable income and therefore causes people to spend more. Tax cuts are more effective if they are targetted at people on low incomes because low income earners have a higher marginal propensity to consume.
- Spending increases. Higher government spending represents an injection into the economy and should cause higher Aggregate demand.
Problems of Fiscal policy
- Higher government borrowing
- May not work. E.g. people may save their tax cuts.
- May cause crowding out
Cutting interest rates should increase consumer spending and investment.
Lower interest rates:
- Reduce cost of borrowing
- reduce mortgage interest payments increasing disposable income
- Reduce incentive to save