Consider the following actions by the Government: 1. Cutting the tax rates 2. Increasing the government spending 3. Abolishing the subsidies In the context of economic recession, which of the above actions can be considered a part of the 'fiscal stimulus' package?

Correct answer is option 1. Fiscal stimulus in a recession typically involves measures that boost aggregate demand—notably cutting taxes and increasing government spending—so as to put more money in private hands and raise G directly, a policy often called “pump-priming” or discretionary stimulus [2]. Both tax cuts and higher public expenditure expand demand and are standard elements of stimulus packages. By contrast, abolishing subsidies removes transfers or price support to consumers/producers, reducing real disposable income and government-supported demand; this is effectively contractionary and would not be part of a fiscal stimulus aimed at reviving demand.

Sources

1. [1] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Fiscal Policy can be either expansionary or contractionary. > p. 154
2. [2] https://www.cbpp.org/research/economy/fiscal-stimulus