UPSC Prelims 2021 Question:

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

Explanation:

• Economic Recession refers to a significant decline in the general economic activity, typically when there are two consecutive quarters of economic decline. To tackle recession, measures must be taken to increase the supply of money in the economy.
  
  
• Increase in expenditure on public projects will lead to increase in money supply in the economy. It will generate output and employment. With more wages, there will be an increase in spending in the economy. This will stimulate further private and public investment and bring the economy out of recession. On the other hand, reduction in public expenditure will lead to decline in money supply in the economy. This will further restrict the economic activity in the country.
  
  
• Cutting tax rates will lead to more money and purchasing power in the hands of people. However, an increase in interest rate will decrease the liquidity in the market. The lendable resources of the banks will decline. This will lead to higher cost of borrowings and decline in investments.
  
  

Therefore, option (2) is the correct answer.

Subject: Economics | Public Finance