What Is Stimulus Package And How It Will Affect The Economy?
The stimulus package is monetary support to the citizens of the respective nation. You can even consider the stimulus package to be tax rebates used by the government to stimulate the nation’s dormant economy.
The idea behind the whole stimulus package and stimulus package checks to offer rebates to boost the economy of the nations by increasing demand in the market. This increase in the demand directing boost the employment rates.
Governments constitute this cycle until the economy reaches a stable point. Due to COVID-19, the global economy has taken massive damage. So the nation is thinking of providing a stimulus package to the nation. This will not be the first time where nations have initiated a stimulus package.
In 2008, countries used the same methods to support the talking economy during the global recession.
What Is A Stimulus Package?
Putting it simply, a stimulus check is a package of collective economic measures issued by the respective government to catalyze the floundering economy. The main purpose of the stimulus package is to revert the recession process and boost spending. This practice will eventually create new jobs.
The theory behind the Stimulus package is that the recession does not have the ability to revert to a healthy position on its own. Hence, government intervention can help to soothe up the impact of the falling economy and recession.
With government intervention, private spending decreases, boosting the overall demand. This demand results in an increase in employment rates.
How do Stimulus Packages work?
It consists of several incentives and tax rebates offered by the government in the form of stimulus checks to boost spending. This practice helps the country pull itself back from the recession and stimulate the slow economy.
Here are forms of the Stimulus packages.
Monetary stimulus is all about cutting down the interest rate. As the interest is cut, there are more incentives for the people to borrow and spend. As borrowing increases, there is more to spend and less to save. This increases the money flow in the financial system.
When a government issues a fiscal stimulus, that means the tax rates will be cut off. This will boost the spending process and hello to revive the economy. When taxation decreases, people have more income to spend on. This process helps to increase the money flow in the financial system.
When a nation increases its economy, more money is injected into the economy. This decreases the unemployment rates.
Quantitative is a monetary expansion policy where the country’s central bank buys fiscal assets from commercial banks and institutions. This practice helps the central bank facilitate the lending process and boost the circulation of the system.
Some Examples Of Stimulus Packages
In March 2020, several countries (including America, India, Russia) came together to coordinate stimulus checks to uplift the economy’s recession. These include the followings:
- Low-interest rate (Close to zero).
- Tax breaks.
- Emergency employment.
- Sector bailout.
Recently, America issued a $900B as a stimulus package to relieve the COVID 19 patients.
Will the Stimulus Package Affect The Global Economy?
Due to the global recession followed by COVID 19, every nation has funneled huge amounts of money in stimulus checks to uplift the economy. The Federal Reserve Balance Sheet has ballooned up from a $4 trillion stimulus package to almost $7 trillion with the recent report.
Some of the financial investors believe that an infusion of cash in the financial system has invoked inflation chances. Due to the fear of inflation, supply stock prices have increased. However, many economists believe that consumer prices will be minimal even after trillions of dollars are offered in the stimulus package.
So far, the weak demand has muted the price on the lower side. And this month has been three consecutive months where the things’ consumer price is at their bare minimum.
The Federal Reservation policymakers have projected a graph depicting that the inflation will be below 2% in the extra two years. They also added that with the inflation rate being under control, the government could follow a third stimulus package after the second.
Balance Sheet Expansion
Economists believe that the inflation rate will be low for the next two years because the consumer price and money creation have weakened in recent years. They justified their prediction with the global recession of 2008, where inflation never surged.
While recent stimulus measures might not directly affect the consumer price, some believe it is due to inflation.
You need to understand that the government issues the $1,200 payment (for single earners) in stimulus checks to boost the economy. Some experts believe that this might change the whole taxation process. However, that is not the case. The stimulus package is non-taxable. On the contrary, they are just advancing on a new credit on your federal taxes for 2020.