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

Question

Accepted Answer

Recession - It is a situation which is characterized by negative growth rate of GDP in two successive quarters. Some of the indicators of a recession include:Slowdown in the economyFall in investmentsFall in the output of the economyIf an economy experiences a recession and GDP falls, tax revenues fall because firms and households pay lower taxes when they earn less. It is prudent for government as well as central bank to follow Expansionary fiscal and monetary policy respectively to stimulate the economy, but keeping in mind the inflationary pressure.In all the given options:Cut in tax rates accompanied by increase in interest rate - Increase in interest rate results into credit crunch in the economy which is not desirable at the time of recession.Increase in expenditure on public projects - It is one of the tools to stimulate the economy at the time of recession, as it triggers the virtuous cycle of investment, which leads to increase in GDP (production of goods & services) and income in the economy and in turn increase in demand, and thus completes the virtuous cycle.Increase in tax rates accompanied by reduction of interest rate - Increase in tax rate is not desirable at the time of recession as income is falling in the economy.Reduction of expenditure on public projects - It is not desirable at the time of recession as it will lead to less government expenditure thereby not contributing much to output.Hence (b) is the correct answer.Source: Vision IAS Economy Study Material Part-I