Q. Which among the following steps is most likely to be taken at the time of an economic recession? (UPSC Prelims 2021)
Answer: Increase in expenditure on public projects
Notes: The correct answer is [B] Increase in expenditure on public projects.During an economic recession, the primary objective of the government and central bank is to stimulate demand and increase the flow of money in the economy. This is typically achieved through Expansionary Fiscal Policy and Accommodative Monetary Policy.

• Increase in expenditure on public projects (Option B – Correct): This is a key tool of fiscal policy. When the government spends more on infrastructure (roads, bridges, etc.), it creates immediate demand for labor and materials. This puts money into the hands of citizens, leading to higher consumption and a "multiplier effect" that helps pull the economy out of a slump.
• Cut in tax rates / Increase in interest rate (Option A – Incorrect): While cutting taxes helps by increasing disposable income, increasing interest rates is a contractionary move. Higher interest rates make borrowing expensive for businesses and consumers, which would further dampen an already recessed economy.
• Increase in tax rates (Option C – Incorrect): Raising taxes during a recession reduces the purchasing power of individuals and the investment capacity of firms, worsening the economic slowdown.
• Reduction of expenditure (Option D – Incorrect): Decreasing public spending is a "pro-cyclical" move during a recession that would lead to further contraction of the GDP. This is often associated with austerity, not recovery.