Economic stimulus is a set of government policies that aim to improve, or stimulate, an economy when it’s struggling. These policy measures are usually monetary or fiscal, but can also include scrapping certain rules to make it easier for businesses to operate. They’re commonly employed during a recession but can also be used to help prevent a depression and ward off other economic crises such as a COVID-19 pandemic.

These measures are typically designed to lower taxes and increase government spending. By increasing people’s disposable income, these strategies incentivize them to spend more, and increase the demand for products that companies must produce and sell. These policies are often used to combat recessions or other economic downturns, and the theories behind them come from economists like John Maynard Keynes who developed their ideas during the Great Depression of the 1930s.

While many economists agree that a fiscal stimulus can be effective, they disagree on how to implement it. For example, some argue that it may not work if the budget deficit rises as a result of the extra spending because that would increase interest rates and make additional investments less profitable. Another concern is that a fiscal stimulus may cause crowding out, where increased government spending causes private sector spending to fall.

However, research suggests that fiscal stimulus may be more effective if it’s targeted at households. For example, if the money is given to people who need it most, such as poor households, they’re likely to spend every dollar they receive. This can stimulate other parts of the economy because those dollars will also reach workers in related industries or regions and businesses that supply them.