Question 50 from UPSC CSE 2021 - Economics

Question

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

IASCODEX · Accepted Answer

Correct Option: B. Increase in expenditure on public projects

Strategy: Increase public expenditure, particularly on infrastructure and public projects, to directly stimulate demand and economic activity during a downturn.

Key Info: **Economic Recessions and Policy Responses**

An economic recession is a significant decline in economic activity, typically identified by negative GDP growth for two consecutive quarters.

**Common Symptoms**
- Rising unemployment
- Reduced investment
- Lower consumer spending
- Declining industrial production

**Combating Recessions**

Governments primarily use expansionary fiscal policy to combat recessions. The most effective measure is increasing public expenditure, especially on infrastructure, construction, and social projects. This spending directly stimulates demand, raises incomes, and encourages private sector activity, leading to economic revival.

In contrast, contractionary policies such as tax hikes, spending cuts, or higher interest rates worsen a recession by reducing disposable income and curbing investment.

While central banks can support recovery with expansionary monetary policy (e.g., lowering interest rates), direct fiscal spending is often preferred for its immediate impact, a principle supported by Keynesian economics.

**Historical Examples**

Notable examples include the New Deal public works programs during the US Great Depression and infrastructure spending in India during economic slowdowns.

IASCODEX · Answer

Option A: Cut in tax rates accompanied by an increase in interest rate

IASCODEX · Answer

Option C: Increase in tax rates accompanied by a reduction of interest rate

IASCODEX · Answer

Option D: Reduction of expenditure on public projects