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Stimulus package is a package of tax rebates and incentives used by the governments of various countries to stimulate the economy and save their country from a financial crisis.
The idea behind a stimulus package is to provide tax rebates and boost spending, as spending increases demand, which leads to an increase in employment rate which in turn increases income and hence boosts spending. This cycle continues until the economy recovers from collapse.
More About Stimulus Package
- The theory behind the usefulness of a stimulus package is rooted in Keynesian economics, which argues that recessions are not self-correcting, and therefore government intervention can lessen the impact of a recession.
- A recession, according to Keynesian economics, is a persistent deficiency of aggregate demand, where the economy will not self correct and instead can reach a new equilibrium at a higher rate of unemployment, lower output, and/or slower growth rates.
- The term economic stimulus is based on an analogy to the biological process of stimulus and response, with the intention of using government policy as a stimulus to elicit a response from the private sector economy.
- Fiscal stimulus differs from expansionary monetary and fiscal policy more generally, in that it is a more specifically targeted and conservative approach to policy.
- Instead of using monetary and fiscal policy to replace private sector spending, economic stimulus is supposed to direct government deficit spending, tax cuts, lowered interest rates, or new credit creation toward specific key sectors of the economy to take advantage of powerful multiplier effects that will indirectly increase private sector consumption and investment spending.
- Economic stimulus is commonly employed during times of recession. Policy tools often used to implement economic stimulus include lowering interest rates, increasing government spending, and quantitative easing, to name a few.
- One such stimulus package was used by the United States in 2008 during the time of the global recession, which was aimed at increasing employment and recovery of the US economy.
- India too used its first stimulus package in 2008 to ensure the safety of bank deposits and stability of the financial system. The government took necessary steps to infuse liquidity into the banking system.
- In an effort to infuse liquidity into the banking system, RBI reduced the CRR as well as repo and reverse repo rates. Also, the problems faced by non-banking financing companies were addressed.
Source: Economic Times & Investopedia
