UPSC Previous Year Question | Prelims GS | 2021

Which among the following steps is most likely to be taken at the time of an economic recession?

  1. Cut in tax rates accompanied by increase in interest rate
  2. Increase in expenditure on public projects
  3. Increase in tax rates accompanied by reduction of interest rate
  4. Reduction of expenditure on public projects

Answer

Correct Answer

Increase in expenditure on public projects

Explanation

In a recession aggregate demand is weak, so governments follow expansionary policies such as higher public expenditure (e.g., on infrastructure projects), tax cuts and lower interest rates. Options (a) and (c) pair an expansionary step with a contractionary one, and (d) would reduce demand further.

Topics: counter-cyclical measures during recession, economy, fiscal & monetary policy, macroeconomics