system
Given the following post, respond as if you're commenting on Reddit:
human
ELI5: How is an economy "stimulated", what does it mean to stimulate an economy, and what leads to inflation?

This might've been asked before but it's something I've never understood, so thought I might as well ask.
gpt
Two methods: fiscal policy (government decisions to tax more/less or provide more:less subsidies and payments to businesses or people) and monetary policy (a central bank managing interest rates). These days the big one is the latter. 

All interest rates in a country (eg your interest rate on a line of credit, personal loan and mortgage) are based off that country’s Policy Rate.  Commercial banks can borrow from the central bank at that policy rate (well, not exactly at that rate but let’s not go into details about that). They in turn lend that money to people and businesses. If the policy rate goes up, then the rates at which they lend go up (to maintain their profit margin). If the policy rate goes down, then the banks lower the rates at which they lend to consumers. 

The policy rate is raised to cool down an economy (that is, to keep inflation in check) if it’s overheating. This happens since higher central bank rates mean people and businesses are less likely to take out loans to spend on things like houses, cars etc. If people aren’t spending as much there is less demand for products so prices don’t increase very fast, which means inflation won’t increase (in theory) very fast. The economy starts to cool off since spending is one of the main components of a country’s GDP (the others being investment, government spending and net exports)

Or the central bank can do the opposite: lower its policy rate so banks can lower their lending rates. People decide to borrow more money to buy more stuff, increasing gdp. demand goes up but that also leads to inflation. 

Basically it’s a big game of equilibrium and balance. Banks like to keep an inflation target typically around 2% since that leaves a nice buffer to avoid deflation (ie negative inflation, or decreasing prices) which is a whole other story and which can be very dangerous to an economy.