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.

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.