What is the Stimulus package? During this covid-19 period, a lot of us must have heard about the term Stimulus package. As a result, you might be wondering what this stimulus package is all about. Today we will discuss everything we can about the Stimulus package.
What is Stimulus Package?
First of all, we will start with the definition of the stimulus package. A stimulus package is a package that the government uses to make unstable economies stable. In addition, the government uses these packages to help economies that are stumbling for one reason or the other. Some of which are: wars, pandemics, natural disasters, etc. In short Stimulus package was introduced based on a theory in Keynesian economics.
Understanding Stimulus Packages
To explain more on this stimulus package, I will use the case of the USA as an example. During the pandemic, on the 27th of March 2020, former President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act. It was a stimulus bill of approximately $2.2 trillion to aid individuals, families, small businesses, and industries affected by the economic slowdown caused by the coronavirus pandemic. The US government used a stimulus package to aid the struggling American economy
How Stimulus Packages work
before we continue with What is Stimulus Package, We will need to talk a little about how Stimulus Packages work. Before the impact of the covid-19 pandemic, stimulus packages usually less intensive than they are these days. In addition, the stimulus packages usually included incentives and tax rebates offered by the Government to pull a country out of recession. Stimulus package can be simplified into 3 forms:
- Monetary stimulus
- Fiscal stimulus
- Quantitative easing
A monetary stimulus is a form of stimulus where interest rates are cut down to increase incentives for people to borrow. Lowering interest rates will encourage people and businesses to borrow more, as a result, there will be more money circulated. Likewise lowering the interest rate will also increase the export rate which will bring more money to an economy.
This involves cutting taxes or increasing spending in order to revive the economy. People have more income because they don’t have to pay much taxes. As a result, people will have more to spend and this will increase demand and lead to economic growth. Equally more money can be added to the economy when the government increases spending which leads to more employment.
Quantitative easing occurs when the Central bank of a country purchases financial assets in large, like bonds from financial institutions. In addition, quantitative easing is a type of expansionary monetary policy. This process will help to increase the excess reserve possessed by financial institutions, increase the price of bonds and lower interest rates. The government uses this method in case monetary stimulus isn’t effective. . . . .
Examples of stimulus Packages
In March 2020, several countries hurried to administer stimulus packages in response to the covid-19 pandemic. This included reducing interest rates to almost zero and providing stabilization systems to the financial markets and support to displaced workers.
After the vote to leave the European Union, in August 2016 the Bank of England (BoE) created a stimulus package to prevent the country from going into a recession. The stimulus package included additional quantitative easing to drive down borrowing costs. The bank’s Monetary Policy Committee voted to purchase another £70 billion in debt, bringing its total quantitative easing program to £445 billion. Interest rates were also cut to 0.25% from 0.50%.
2008 to 2009 financial crisis
2008 to 2009 nine financial Crises had a lot of effects on the world. The global recession led to governments of the world using some shocking stimulus packages. One of the most shocking of them was that of the US. The US used a stimulus package called the American Recovery and Reinvestment Act (ARRA) in 2009. This stimulus package contained large arrays of tax breaks and spending projects for the swift revival of the US economy. The stimulus package cost $212 billion for a tax cut, $296 billion for Medicaid, and others $279 billion. As of 2014, the estimate was $832 billion.
Frequently asked questions
What is a stimulus package?
A stimulus package is a package that the government uses to make unstable economies stable. Stimulus packages are often used when there are some major economic risks. Stimulus packages are examples of Keynesian economic policy.
What is the difference between economic and fiscal stimulus?
A monetary stimulus is a form of stimulus where interest rates are cut down to increase incentives for people to borrow. Lowering interest rates will encourage people and businesses to borrow more, as a result, there will be more money circulated. In contrast, This involves cutting taxes or increasing spending in order to revive the economy. People have more income because they don’t have to pay much taxes
Do stimulus packages produce inflation?
Some economists debate on whether or not stimulus packages cause inflation. Some economists believe that stimulus packages increase the amount of money in circulation without increasing the productivity of the economy. Using this logic, inflation cannot be escaped. although some large economies like china used large-scale stimulus more than once and are not experienced inflation.
To sum it up, we can’t really tell how stimulus packages will affect us in the future.