Question

How can we measure the effectiveness of the stimulus package?

Answer 1

Ans:-

A stimulus package is a package of economic measures put together by a government to stimulate a floundering economy. The objective of a stimulus package is to reinvigorate the economy and prevent or reverse a recession by boosting employment and spending.

The theory behind the usefulness of a stimulus package is rooted in Keynesian economics, which argues that the impact of a recession can be lessened with increased government spending.

How its Work

A stimulus package includes a number of incentives and tax rebates offered by a government to boost spending in a bid to pull a country out of a recession or to prevent an economic slowdown. A stimulus package can be in the form of either a monetary stimulus or a fiscal stimulus. Quantitative easing (QE) is another form of monetary stimulus.

Monetary stimulus

A monetary stimulus involves cutting interest rates to stimulate the economy. When interest rates are cut, there is more incentive for people to borrow as the cost of borrowing is reduced.

An increase in borrowing means there’ll be more money in circulation, less incentive to save, and more incentive to spend. Lowering interest rates could also weaken the exchange rate of a country, thereby leading to a boost in exports. When exports are increased, more money enters the economy, encouraging spending and stirring up the economy.

Fiscal stimulus

When a government opts for a fiscal stimulus, it cuts taxes or increases its spending in a bid to revive the economy. When taxes are cut, people have more income at their disposal. An increase in disposable income means more spending in the country to boost economic growth. When the government increases its spending, it injects more money into the economy, which decreases the unemployment rate, increases spending, and eventually, counters the impact of a recession.

Quantitative easing

This is an expansionary monetary policy in which the central bank of a country purchases a large number of financial assets, such as bonds, from commercial banks and other financial institutions. The purchase of these assets in large amounts increases the excess reserves held by the financial institutions, facilitates lending, increases the money supply in circulation, drives up the price of bonds, lowers the yield, and lowers interest rates. A government will usually opt for quantitative easing when a conventional monetary stimulus is no longer effective.

Examples of Stimulus Packages

In March 2020 several countries, including the United States (as noted above), scrambled to coordinate stimulus packages in response to the global coronavirus pandemic. This included cutting interest rates close to zero and providing stabilization mechanisms to the financial markets in conjunction with tax breaks, sector bailouts, and emergency unemployment support to displaced workers.

Following the vote to leave the European Union, the Bank of England (BoE) designed a stimulus package to prevent the country from going into a recession. Part of the stimulus package included a quantitative easing plan to purchase £10 billion worth of corporate debt from a pool of £150 billion in order to drive down borrowing costs. Interest rates were also cut to 0.25% from 0.50%.

Stimulus Package may refer to:

• Coronavirus Aid, Relief, and Economic Security Act in 2020
• government spending meant as an economic stimulus as part of a fiscal policy
• The Stimulus Package, album from rapper Freeway
• Economic Stimulus Act of 2008
• American Recovery and Reinvestment Act of 2009
• In india , govt relief package of amount of 20lakh crores rupess.