Which among the following steps is most likely to be taken at the time of an economic recession?
Cut in tax rates accompanied by increase in interest rate
Increase in expenditure on public projects
Increase in tax rates accompanied by reduction of interest rate
Reduction of expenditure on public projects
Answer is Wrong!
Answer is Right!
This question was previously asked in
UPSC IAS – 2021
– Increasing expenditure on public projects (like infrastructure) directly injects money into the economy, creates jobs, increases income, and stimulates further spending through the multiplier effect. This is an expansionary fiscal policy.
– Cutting tax rates is also an expansionary fiscal policy, as it increases disposable income, potentially leading to increased consumption and investment. Increasing tax rates is contractionary.
– Reducing interest rates is an expansionary monetary policy aimed at making borrowing cheaper to encourage investment and consumption. Increasing interest rates is contractionary.
– To combat a recession, expansionary policies are needed. Options A, C, and D involve either contractionary elements or exclusively contractionary policies (D). Option B is a clear expansionary fiscal policy.