Which among the following steps is most likely to be taken at the time of an economic recession?
- (a) Cut in tax rates accompanied by increase in interest rate
- (b) Increase in expenditure on public projects ✓ UPSC's answer
- (c) Increase in tax rates accompanied by reduction of interest rate
- (d) Reduction of expenditure on public projects
Why the answer is (b)
• In a recession demand collapses; the Keynesian remedy is expansionary fiscal policy — increasing government spending on public projects to create jobs and revive demand through the multiplier — option (b).
• Monetary policy is also loosened by cutting interest rates, so options pairing a tax cut with higher interest rates (a) or a tax rise with lower rates (c) mix stimulus with restraint.
• Cutting public spending (d) would deepen the downturn.
• India's post-COVID stimulus emphasised capital expenditure for this reason.
• Hence option (b).
Why the other options are wrong
- (a) Cut in tax rates accompanied by increase in interest rate
- Raising interest rates contradicts recession policy.
- (c) Increase in tax rates accompanied by reduction of interest rate
- Raising taxes reduces demand during a recession.
- (d) Reduction of expenditure on public projects
- Cutting public spending worsens a recession.
Asked in the GS Paper I of the UPSC Civil Services Preliminary Examination 2021, held on 10 October 2021. Question and answer key: Union Public Service Commission. Explanation: UPSC Answer Check.