What economic situation typically prompts the use of fiscal stimulus?

The use of fiscal stimulus is typically prompted by a recession. During a recession, economic activity slows down, leading to decreased consumer spending, lower business investment, and rising unemployment. This situation often results in reduced demand for goods and services, creating a cycle of economic decline.

Fiscal stimulus involves government actions, such as increased public spending or tax cuts, aimed at boosting aggregate demand. The intention is to inject money into the economy, encouraging businesses to invest and consumers to spend, thereby stimulating economic growth. By providing more disposable income through tax reductions or by directly investing in projects, the government seeks to counteract the negative effects of the recession. This approach is based on the belief that active government intervention can help stabilize the economy during downturns and promote recovery.

In contrast, economic booms and stable growth periods generally do not necessitate fiscal stimulus since the economy is already performing well. Similarly, in situations of inflation crisis, the focus would typically be on controlling inflation rather than stimulating the economy further.