Other terms useful for understanding fiscal stimulus include the following: Fiscal stimulus can reduce this hit to demand by providing people with the resources they need to continue purchasing goods and services.
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When it is safe to reopen businesses and for people to go back to work, the temporary supply constraints will be reduced, but economic “slack” - the gap between aggregate demand and what the economy is capable of producing with full use of its productive resources - will likely persist due to weak demand. For example, slowdowns and business failures in restaurants and retail mean that their employees will face reduced hours or layoffs, and they will in turn reduce their own spending, lowering demand for an even wider range of goods and services. And falling demand due to lost income in such sectors can make the recession even deeper when it spreads to goods and services that could still be produced if the demand were there. Retail sales were down 16.4 percent in April, for example.
In the case of COVID-19, however, the pandemic and public health response have temporarily reduced both the quantity of goods and services the economy can produce and households’ disposable income, which supports the demand for these goods and services. In recessions, the economy produces less than it is capable of when businesses are operating at full capacity and workers are fully employed, usually due to insufficient demand for goods and services. This is why it’s important that lawmakers use the policy tools available to them to reduce the severity of recessions.
Long unemployment spells and business failures can also depress the economy’s productive capacity far beyond a recession’s end. Prolonged unemployment harms not only workers’ job prospects and lifetime earnings but also their and their families’ health and well-being. Recessions can have profound human and economic costs. A recession is a significant decline in economic activity lasting more than a few months, whose precise start and end dates are determined after the fact by the National Bureau of Economic Research. The United States is almost certainly in a recession caused by COVID-19 and the public health measures needed to combat it. This bolsters aggregate demand, lessening the recession’s depth and length and promoting a stronger recovery. Strong, well-targeted fiscal stimulus allows people and businesses to keep purchasing goods and services. The federal government provides fiscal stimulus when it increases spending, cuts taxes, or both, to shore up households’ and businesses’ demand for goods and services during a recession.
This bolsters aggregate demand, lessening the recession’s depth and length and promoting a stronger recovery.Fiscal stimulus is an important tool that policymakers can use to reduce the severity of recessions.
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