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

Q: What is UPSC Prelims?

UPSC Prelims is a competitive examination conducted in India. This question is from the 2021 UPSC Prelims Economy paper.

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This UPSC Prelims 2021 Economy question has a easy difficulty level and is marked as an important question.

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Question

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

Accepted Answer

Correct Answer: B — Increase in expenditure on public projectsStep-by-step Solution:A recession is defined as two consecutive quarters of negative GDP growth. During a recession, economic activity slows down, investments fall, and output contracts. The appropriate policy response is expansionary fiscal and monetary policy to stimulate the economy.Option B — Increase in expenditure on public projects: This is correct. Increased government spending on public projects injects money into the economy, triggers a virtuous cycle of investment, increases GDP, generates income, boosts demand, and helps revive the economy. ✓Other options are incorrect because they are either contractionary or have contradictory components.Why other options are incorrect:Option A (Cut tax rates + increase interest rate): While tax cuts are expansionary, increasing interest rate tightens credit and reduces money supply, which is counterproductive during a recession.Option C (Increase tax rates + reduce interest rate): Increasing taxes reduces disposable income and demand, worsening the recession despite lower interest rates.Option D (Reduction of expenditure on public projects): This is contractionary fiscal policy, which would deepen the recession.Key Concept: Recession management: The government uses expansionary fiscal policy (increased spending, tax cuts) and the central bank uses expansionary monetary policy (lower interest rates, open market purchases). Increased public expenditure directly boosts aggregate demand through multiplier effect. India follows a counter-cyclical fiscal policy to stabilise the economy.

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

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

Master UPSC Prelims with Our Test Series

More Questions from Basic Economic Concepts – Micro & Macro Economics

Frequently Asked Questions