| Understanding External Stimulus |
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| External stimulus / fiscal stimulus / stimulus packages have become common terms after the world suffered one of its worst meltdowns.
Let’s try and understand what they conceptually mean with the help of an interesting story…
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Understanding External Stimulus
- In a small town in the US, the weather is horrendous and hence, despite being a holiday season, business is not picking up.
- Earnings and profits being affected, everyone is in debt.
- Luckily, a rich Russian tourist arrives in the foyer of the small local hotel.
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He asks for a room and puts a $1000 note as advance on the reception counter and books a room for use after 7 days.
The hotel owner takes the banknote in a hurry and rushes to his meat supplier to whom he owes $1000.
Now…
- The butcher takes the money and races to his wholesale supplier to pay his debt.
- The wholesaler rushes to the farmer to pay $1000 for pigs he purchased some time ago.
- The farmer triumphantly gives the $1000 note to a local cook who cooked food for him on credit.
- The cook goes quickly to the hotel, as she owed the hotel for using their kitchen.
- But here’s the twist in the tale: The Russian comes back after 7 days and informs the hotel owner that his plan of staying in the hotel is cancelled and takes his $1000 advance back and departs.
So while there was no profit or income, everyone got free of their debts and the small town people now look optimistically towards their future!
- Thus the fiscal stimulus of the $1000 advance was the liquidity that got circulated within the economy and improved sentiments of the various stakeholders by making them get rid of their debt.
- Once debt-free, people would happily resume their consumption, giving the various players in the economy a boost.
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Hope this story succeeded in clarifying the concept of External Stimulus
Please give us your feedback at
professor@tataamc.com
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