Question 3
AOptions
BSolution
An economic recession is characterized by a significant decline in economic activity across the economy, typically visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. During a recession, there is often a lack of demand and high unemployment.
To combat a recession, governments typically implement expansionary fiscal policies to stimulate demand and create jobs. Increasing expenditure on public projects (like infrastructure development) is a direct form of expansionary fiscal policy. It injects money into the economy, creates employment opportunities, and boosts aggregate demand, thereby helping to lift the economy out of recession.
Options A and C involve contradictory policy mixes (e.g., cut in tax rates with increased interest rates, or increased tax rates which are contractionary during recession). Option D (Reduction of expenditure on public projects) would further contract the economy and worsen the recession.
Therefore, an increase in expenditure on public projects is the most appropriate and likely step to be taken during an economic recession.
CStrategy
For questions related to economic cycles and policy responses, understand the fundamental tools of fiscal and monetary policy and their intended effects during different phases of the business cycle (e.g., recession, boom). Identify policies that stimulate demand during a downturn.
DSyllabus Analysis
This question relates to the Indian Economy, specifically macroeconomics, fiscal policy, and the management of business cycles.
EQuestion Analysis
Easy to Medium. This is a foundational concept in macroeconomics regarding counter-cyclical fiscal policy.