Economic stimulus is the use of government deficit spending, tax cuts, or lower interest rates to increase aggregate demand. It is typically employed during a recession to get people back to work and spending money. The theory behind economic stimulus goes back to economist John Maynard Keynes and was popularized during the Great Depression of the 1930’s.

Economists have argued that economic stimulus measures can be highly effective in helping to jumpstart frozen credit markets, restore consumer spending, and stimulate the economy through the power of multiplier effects. However, implementing such a program is challenging because of the long-term costs and risks associated with monetary and fiscal stimulus.

Monetary and fiscal economic stimulus can take the form of cutting interest rates, or quantitative easing (QE), where the central bank buys assets to push down the cost of borrowing. Economic stimulus can also take the form of a government spending increase, often known as a “stimulus package.” Ideally, an economic stimulus plan should be timely, temporary, and targeted to maximize its short-run benefits.

Some of the most powerful economic stimulus packages focus on low-income households and businesses. These groups are typically the first to feel the impact of economic downturns, and they have a greater marginal propensity to consume. Other popular economic stimulus programs include lowering income taxes, enhancing food stamp benefits, expanding child tax credits, and increasing unemployment assistance. Similarly, federal fiscal relief for states and localities generally rates high on the bang-for-the-buck scale. This type of economic stimulus helps to offset state budget deficits caused by falling tax receipts and increased demands on services due to rising poverty and unemployment.