What is a 'Stimulus Package'

A stimulus package is a package of economic measures put together by a government to stimulate a floundering economy. The objective of a stimulus package is to reinvigorate the economy and prevent or reverse a recession by boosting employment and spending.

The theory behind the usefulness of a stimulus package is rooted in Keynesian economics, which argues that the impact of a recession can be lessened with increased government spending.

BREAKING DOWN 'Stimulus Package'

A stimulus package is a number of incentives and tax rebates offered by a government to boost spending in a bid to pull a country out of a recession or to prevent an economic slowdown. A stimulus package can either be in the form of a monetary stimulus or a fiscal stimulus. A monetary stimulus involves cutting interest rates to stimulate the economy. When interest rates are cut, there is more incentive for people to borrow as the cost of borrowing is reduced. An increase in borrowing means there’ll be more money in circulation, less incentive to save, and more incentive to spend. Lowering interest rates could also weaken the exchange rate of a country, thereby leading to a boost in exports. When exports are increased, more money enters the economy, encouraging spending and stirring up the economy.

Stimulus Package in Practice

Another form of monetary stimulus is quantitative easing, an expansionary monetary policy in which the central bank of a country purchases large quantity of financial assets, such as bonds, from commercial banks and other financial institutions. The purchase of these assets in large amounts increases the excess reserves held by the financial institutions, facilitates lending, increases the money supply in circulation, drives up the price of bonds, lowers the yield, and lowers interest rates. A government will usually opt for quantitative easing when conventional monetary stimulus is no longer effective.

Following the vote to leave the European Union, the Bank of England designed a stimulus package to prevent the country from going into a recession. Part of the stimulus package included a quantitative easing plan to purchase £10 billion worth of corporate debt from a pool of £150 billion in order to drive down borrowing costs. Interest rates were also cut to 0.25% from 0.5%.

When a government opts for a fiscal stimulus, it cuts taxes or increases its spending in a bid to revive the economy. When taxes are cut, people have more income at their disposal. An increase in disposable income means more spending in the country to boost economy growth. When the government increases its spending, it injects more money into the economy, which decreases the unemployment rate, increases spending, and eventually, counter the impact of a recession.

The global recession of 2008-2009 led to unprecedented stimulus packages being unveiled by governments around the world. In the United States, A $787-billion stimulus package known as the American Recovery and Reinvestment Act (ARRA) of 2009 contained a huge array of tax breaks and spending projects aimed at vigorous job creation and a swift revival of the U.S. economy. The stimulus package consisted of tax rebates that cut taxes by $288 billion, $275 billion allocated to federal contracts and grants to foster job creation, and $224 billion assigned to unemployment assistance, healthcare, and education to keep the economy afloat.

A potential problem of fiscal stimulus is that to increase public spending, the government has to increase its borrowing, which would lead to a higher Debt-to-GDP ratio. Also, people may actually choose to save the excess disposable income instead of spending it, which could render the stimulus package ineffective.

RELATED TERMS
  1. Economic Stimulus

    Economic stimulus refers to attempts by governments or government ...
  2. Stimulus Check

    Stimulus Check is money sent to a taxpayer by the U.S. government ...
  3. American Recovery And Reinvestment ...

    The American Recovery and Reinvestment Act of 2009 was a law ...
  4. Package Deal

    Package deals allow traders to ensure specific prices or times ...
  5. Keynesian Economics

    Keynesian Economics is an economic theory of total spending in ...
  6. Pump Priming

    Pump priming is the action taken to stimulate an economy, usually ...
Related Articles
  1. Tech

    Rifts Emerge Over Stimulus at G20, Markets Rise

    Markets extended their rally Friday morning on a rise in crude oil prices and hopes of further stimulus.
  2. Insights

    Fiscal Policy vs. Monetary Policy: Pros & Cons

    When it comes to influencing macroeconomic outcomes, governments have typically relied on one of two courses of action: monetary policy or fiscal policy.
  3. Retirement

    Should You Accept an Early Retirement Offer?

    Is it wise to accept an early retirement package? Here's what you need to consider.
  4. Investing

    Ben Bernanke: Economy Is Headed 'Off The Cliff'

    The former Federal Reserve chairman, who navigated the 2008 financial crisis, is worried.
  5. Trading

    Investopedia Forex Outlook For February 2013

    The global economy is on relatively solid footing, after U.S. markets rose thanks to a debt deal and Japan introduced new stimulus in January.
  6. Insights

    Can Infrastructure Spending Really Stimulate the Economy?

    Public infrastructure spending rarely stimulates long-term positive growth for the economy, even in times of recession...
  7. Insights

    A Look at Fiscal and Monetary Policy

    Learn more about which policy is better for the economy, monetary policy or fiscal policy. Find out which side of the fence you're on.
  8. Insights

    How Interest Rates Affect The U.S. Markets

    Interest rates can have both positive and negative effects on U.S. stocks, bonds and inflation.
  9. Insights

    6 Factors That Point to Global Recession in 2016

    We may be on the verge of another global recession.
  10. Investing

    Deflation and Debt: Is the United States the New Japan?

    Discover how mainstream macroeconomics has failed Japan and why the United States should take care to avoid Japan's borrow, spend and print model.
RELATED FAQS
  1. How can a change in fiscal policy have a multiplier effect on the economy?

    Learn about how changes in fiscal policy have a multiplier effect on the economy. The goal of expansionary fiscal policy ... Read Answer >>
  2. What are some important financial ratios to evaluate with respect to consumer packaged ...

    Understand various activity and solvency ratios, and learn why these ratios are important when evaluating the consumer packaged ... Read Answer >>
  3. How does expansionary economic policy impact the stock market?

    Find out how expansionary economic policy affects the stock market; it is bullish for stocks whether it is monetary or fiscal ... Read Answer >>
  4. What can policymakers do to decrease cyclical unemployment?

    Learn about the tools available to policymakers to reduce cyclical unemployment, and find out more about the role of expansionary ... Read Answer >>
Trading Center