It is not really easy to understand what is stimulus in economics. However, the basic idea behind this concept is that the recession prevailing in the United States has created a need for the government to inject some money into the economy to avert any major damage to the country. In other words, the United States Federal Reserve or the government is being asked by the American people to pump stimulus money into the economy so that they can recover from their slump. The money that is injected will be used for various economic purposes including reducing unemployment, raising consumer spending power, and disbursing federal stimulus monies to state and local governments, for the purpose of creating jobs.
Stimulus money is pumped into the economy as soon as there is a sign of recession in the economy. This money is pumped by the central bank, which is usually a bank in America like the Federal Reserve Bank. Usually banks are the financial powerhouses of the country that have a long history of lending money. They usually use long term assets as collateral with the hope of getting some kind of return on their investment. The central bank thus borrows money from the private lenders and uses it to finance the economic activities of the country. They thus end up creating a massive inflation in the economy, and making everything costlier.
It is therefore natural for the public to ask questions like – what is the stimulus in economics? How does inflation affect the working of the economy? Will the cost of living go up? How are these problems tackled?
Basically, the whole idea behind stimulus in economics is that the money that is being pumped into the economy via credit lines and other such financial instruments will be spent on infrastructure, raising consumer demand, creating jobs, and boosting business activity. In other words, stimulus money acts as a catalyst that speeds up the rate of growth in the economy. As more money is pumped into the economy, the overall economic activity automatically increases. It is this increased economic activity that stimulates the economy further, making the unemployment rates lower, and allowing the economy to become more productive. As inflation starts to go down, consumers feel more confident about spending, which leads to an increase in business activity.
All this sounds very simple, but the question is – how do the economists justify that the government should invest money in the economy through this fiscal policy, especially when private sector investment has been doing so well? One answer could be that the state cannot afford to do anything else. After all, it is acting as fiscal agent for the government. A second possible answer could be that state governments have a lot of other important things to do, which would not be affected by what is termed as stimulus in economics. A third possible explanation could be that economists have never argued against the fact that the government should spend money on its own economy. So why does this matter?
This all boils down to one simple argument: the stimulus money pumped into the economy has done nothing if there is no further investment in economic activity. If there is no further economic activity, then what is the stimulus in economics? Stimulus in economics is money spent, if there is no money spent than what is stimulus in economics? . . . . . . The fact remains that the stimulus package has done little or nothing for the economy so far. Hopefully, this article has taught you something new about stimulus in economics and how the notion of stimulus affects the entire economy.