When times are tough (think: recessions), everyone feels more like saving than spending. If you didn’t already lose your job, lots of people around you did. Now’s not the time to buy that new gaming console. It’s time to save up, in case you’re next.
Yet that’s just the problem with recessions. They’re sustained by people not spending. If you think about what the economy is in the first place: it’s spending. When you spend, you create income for other people, and investment for other companies. Then those people and companies spend, and around and around we go: the merry-go-round of the economy.
Stimulus packages are measures designed to get people to spend, even when everything around them is telling them to save. This is a mainstay of Keynesian economics, which is the status quo of most major macroeconomic policies today.
Keynes was all about getting people to spend...but how? Stimulus packages can include anything that encourages people to spend. Maybe tax cuts, or stimulus checks. Maybe an increase in government spending, or public works programs. Maybe pumping more money into the system via quantitative easing. Maybe cutting interest rates, so borrowing is cheap. Some countries have even done a negative interest rate, which means they’ll pay you to take out a loan. Yeah. That happened.
If your head wasn’t under a rock in 2008 and 2009, you’ll know that the U.S. executed a fat ($787 billion) stimulus package via the American Recovery and Reinvestment Act. It included tax breaks, spending projects for job creation, and multiple types of assistance. Sometimes, people just need a nudge before they’ll put their hand in their wallets again.
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Finance: What is the Federal Open Market...15 Views
finance a la shmoop what is the Federal Open Market Committee... FOMC! come say it
with me FOMC yeah that's the noise of meatball makes when it hits the floor it [Meatball lands on the floor]
also happens to be the acronym for the Federal Open Market Committee and part
of its purpose in life is to manage financial outcomes through monetary
policy all right well the Federal Reserve pulls three levers of monetary [3 Levers appear]
policy discount rates open market operations and bank reserve requirements
those are the big three the big three monetary policies used to try and [Monetary policies appear]
control the economy well the font is responsible for the open market
operations part of that equation it tries to fight the twin evils of [Person pulls open market lever]
unemployment and inflation and among other things if unemployment is high
well in general the FOMC will seek to increase the supply of money by holding
back on sales of government paper like t-bills bonds notes and all that good
stuff leaving more cash sloshing around in the [Dollar bills appear]
marketplace and hopefully encouraging the cost of renting money or interest
rates to decline like encouraging people to borrow because rates are cheap well
when people can borrow more cheaply yes they're incentivized to spend more at [Person picks up stack of cash]
the mall on earrings and rings for other places well it works in the opposite
direction as well with the FOMC fearing inflation while they'll issue
lots of government paper sucking out the excess cash that was previously in the [Money supply meter declines]
marketplace and likely causing interest rates to rise right so cash will be less
available and people want more to rent their precious dollars as interest got
it okay well the key issue remains that the FOMC is making money more expensive
when it does that when an issues paper sucking cash out of the system it's hard
concept for most people including me to understand here
well the FOMC called eight secret very dan Brown like meetings a year to look [Months of year appear on calendar]
through reams of data and decide what policy should be note that they're
applying monetary policy here to do their bidding not fiscal policy the gist
is that the committee is the one sitting atop monetary policy in the US and it's
the committee who makes the decisions on the big three dials they can turn one [Committee standing by 3 dials]
two and three they can sift through data on the economy jobs inflation bang
fear surveys etc and then make decisions about what to do or you know what not to
do I remember that Soup Nazi from Seinfeld no bonds for you [Nazi holding a bond]
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