Stimulus checks are payments given to individuals by the government based on taxes paid in the previous year. The hope is that the recipients of these checks will increase spending, thus stimulating the economy.

How do stimulus checks work?
Stimulus checks are a short-term solution primarily used in a lagging economy. By infusing money into an economy, the government is attempting to increase the spending habits of individuals and boost general consumer confidence. Ideally, consumers will go out and spend the money, which will help businesses maintain adequate cash flows to pay their bills and employ their workers. If the stimulus checks are placed into a savings account, the banks will be able to lend out more money to more spenders. If the checks are used to pay debts, they could reduce loan defaults. (To read more on consumer confidence and how it affects the economy, read Consumer Confidence: A Killer Statistic.)

A slow economy will have less flow of capital. This means fewer people spend, fewer businesses get money and, therefore, businesses cannot pay wages. Some businesses might even lay off workers. This slows down the economy. A healthier economy will have a higher flow of capital; residents spend more and businesses make money. These businesses employ more people who spend more, creating a healthy economic cycle.

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