How do government issued stimulus checks improve the economy?

Investment Question
How do government issued stimulus checks improve the economy?

Stimulus checks are payments given to individuals by the government based on taxes paid in the previous year. The hope is that the recipients of these checks will increase spending, thus stimulating the economy.

So how does it improve the economy?

A slow economy will have less flow of capital. This means less people spend, less businesses get money and therefore the businesses can not pay wages. Some businesses might even layoff workers. This creates a bad cycle and a slower economy.

A good economy will have a higher flow of capital; residents spend more, businesses make money, and employ more people who spend more.

Of course economies are much more complex with factors, such as inflation, international sales and standard of living. (To learn more check out Economic Basics and Macroeconomic Analysis.)By infusing money into an economy the government is attempting to increase the spending habits of individuals and general consumer confidence.

Ideally they will go out and spend the money which will help businesses maintain adequate cash flows to pay their bills and employ their workers. If placed into a savings account the banks will be able to lend out more money to more spenders. If used to pay debts the stimulus check could reduce the risks of defaulting on loans. It is a short run solution, primarily used in a lagging economy.

(To read more on consumer confidence and how it affects the economy, read Consumer Confidence: A Killer Statistic.)

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