Economic Stimulus (Monetary Stimulus and Fiscal Stimulus) Explained in One Minute

During periods of economic turbulence, the government and the central bank of a country can try to stimulate the economy. Central banks do it by lowering interest rates in order to make it cheaper to borrow money on the one hand. On the other hand, they can even directly inject money into the system through monetary easing. The government has other tools at its disposal. On the one hand, it can encourage the private sector to become more active by lowering taxes and on the other hand it can increase public spending to compensate for the lack of private sector demand. This is for the most part how the central bank and the government of a country can try to stimulate the economy.

The main question however is this. Should the Keynesian economists believe that? Yes, the state should intervene in the economy whenever there is a crisis, because they don’t think that the market is capable of rebounding properly. Austrian economists on the other hand, believe the exact opposite. The pain caused by a financial crisis is bitter, but necessary medicine and that the state should stay out because its involvement does more harm than good. These are basically the two extremes and quite frankly economists don’t yet know for sure what needs to be done after a crisis. That is pretty much the unpleasant truth.

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