Question map
Not attempted Correct Incorrect ★ Bookmarked
Loading…
Q33 (IAS/2021) Economy › Growth, Development, Poverty & Employment › Macroeconomic policy tools Official Key

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

Result
Your answer: —  ·  Correct: B
Explanation

The correct answer is Option 2: Increase in expenditure on public projects.

During an economic recession, the primary objective of the government is to stimulate demand and boost economic activity. This is typically achieved through Expansionary Fiscal Policy. Increasing expenditure on public projects (like infrastructure) serves two main purposes:

  • Multiplier Effect: Public spending injects liquidity into the economy, creating jobs and increasing the disposable income of citizens.
  • Crowding-in Investment: Enhanced infrastructure lowers business costs, encouraging private investment.

Why other options are incorrect:

  • Option 1 & 3: Increasing interest rates or tax rates are contractionary measures that reduce liquidity and discourage consumption, worsening a recession.
  • Option 4: Reducing public expenditure (Austerity) further decreases aggregate demand, leading to a deeper economic slowdown.

Therefore, increasing public spending is the most effective counter-cyclical measure to revive growth.

How others answered
Each bar shows the % of students who chose that option. Green bar = correct answer, blue outline = your choice.
Community Performance
Out of everyone who attempted this question.
57%
got it right
PROVENANCE & STUDY PATTERN
Guest preview
Don’t just practise – reverse-engineer the question. This panel shows where this PYQ came from (books / web), how the examiner broke it into hidden statements, and which nearby micro-concepts you were supposed to learn from it. Treat it like an autopsy of the question: what might have triggered it, which exact lines in the book matter, and what linked ideas you should carry forward to future questions.
Q. Which among the following steps is most likely to be taken at the time of an economic recession? [A] Cut in tax rates accompanied by inc…
At a glance
Origin: Books + Current Affairs Fairness: Low / Borderline fairness Books / CA: 2.5/10 · 7.5/10
You're seeing a guest preview. The Verdict and first statement analysis are open. Login with Google to unlock all tabs.

This is a classic 'Applied Macroeconomics' question. While the context was the 2020-21 COVID recession, the answer lies in static NCERT concepts (Keynesian theory). It tests if you understand the difference between Expansionary and Contractionary policy tools.

How this question is built

This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.

Statement 1
Are cuts in tax rates combined with increases in interest rates commonly implemented as policy responses during an economic recession?
Origin: Web / Current Affairs Fairness: CA heavy Web-answerable

Web source
Presence: 4/5
"Despite the cuts in tax rates (both PIT and CIT),"
Why this source?
  • Explicitly notes that governments have implemented cuts in tax rates (both personal and corporate).
  • Shows that tax-rate cuts are a recognized policy change, relevant to the question's tax-rate half.
Web source
Presence: 4/5
"some countries have already implemented historically low interest rates."
Why this source?
  • Describes that many countries have already implemented historically low or near-zero interest rates.
  • Implies that policy responses to downturns tend to lower interest rates rather than raise them.
Web source
Presence: 4/5
"underpinned a cut in the country’s policy interest rate by 200 bp to 13.0 per cent."
Why this source?
  • Gives concrete examples of central banks cutting policy interest rates in response to a slowing economy.
  • Provides direct evidence that interest-rate cuts, not increases, are used as a policy response during downturns.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > vert 2010 \vert > p. 129
Strength: 4/5
“\vert 2010 \vert 15. In India, the tax proceeds of which one of the following as a percentage of gross tax revenue has significantly declined in the last five years? • (a) Service tax • (b) Personal income tax • (c) Excise duty • (d) Corporation tax 16. 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? • (b) 2 only • (a) 1 and 2 only • (d) 1, 2 and 3 • (c) 1 and 3 only 17.”
Why relevant

Shows that 'cutting the tax rates' is listed as a possible part of a fiscal stimulus during a recession (question item about fiscal stimulus actions).

How to extend

A student can take this rule (tax cuts = expansionary fiscal tool) and check historical recession policies to see if tax cuts were used.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Fiscal Policy can be either expansionary or contractionary. > p. 155
Strength: 5/5
“Fiscal Policy Expenditure | Expenditure | Deepens recessions and • increases | decreases | amplifies expansions, thereby • Tax decreases | Tax increases | increasing fluctuations in the business cycles Expenditure | Expenditure | Softens the recession and • decreases | increases | moderates the expansions, Cyclical | Tax increases | Tax decreases | thereby decreasing fluctuations in the business cycle Fiscal Consolidation policy: It is an effort by the Government to bring down fiscal deficit. It is an effort to reduce public debt, raise revenues and bring down wasteful expenses.”
Why relevant

States that tax decreases 'soften the recession' as an expansionary fiscal policy, linking tax cuts to recession-fighting policy.

How to extend

Combine with basic knowledge that policymakers aim to boost demand in recessions to infer tax cuts are a common response.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > Fiscal Stimulus > p. 117
Strength: 5/5
“• Fiscal stimulus consists of the attempts by Governments or Government agencies to financially stimulate an economy. • A fiscal stimulus is the use of monetary or fiscal policy changes to kickstart economic growth during a recession. • Governments can accomplish this by using tactics such as lowering interest rates, increasing Government spending and quantitative easing, to name a few.”
Why relevant

Lists 'lowering interest rates' among tactics to stimulate an economy during a recession (as part of fiscal/monetary stimulus mix).

How to extend

Contrast this with the idea of 'increasing interest rates' to judge whether rate hikes align with typical recession stimulus.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.28 Liquidity Trap > p. 111
Strength: 5/5
“To pull the economy out of recession i.e. to stimulate the economy, the Central Bank may reduce the repo rate to increase the supply of money and to push demand. When the repo rate is reduced, the banks will reduce the deposit rates and lending rate. But if the demand in the economy is not increasing, then Central Bank may further reduce the repo rate to increase the money supply and demand. But if still the economy is not pulled out of recession/slowdown and the demand is not increasing, then Central Bank may keep on reducing the repo rate and the banks will keep on reducing their deposit and lending rates.”
Why relevant

Explains central bank behaviour in recessions: the repo rate is reduced to increase money supply and push demand, implying rate cuts (not increases) are used to combat recessions.

How to extend

Use the standard fact that central banks control policy rates to infer that increasing interest rates would be counter‑to this described practice.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > Counter-Cyclical Fiscal Policy > p. 124
Strength: 4/5
“Amidst the COVID-19 pandemic crisis, there was a serious debate regarding the public finance concerning debt sustainability, sovereign ratings, etc. In this scenario, fiscal policy must be counter-cyclical to smooth out economic cycles instead of exacerbating them. In simple terms, under this phenomenon, the Government makes excess expenditure during recession and adopts a tighter fiscal policy during economic boom. In countries like India, greater public expenditure and job creation are paramount in economic recession. On the other hand, during economic boom, the Government must restrain itself from excessive public expenditure to prevent the crowding-out effect detrimental to private investments. During Ancient and Medieval times, the kings used to build monuments during famines and droughts in order to generate employment.”
Why relevant

Describes 'counter‑cyclical' fiscal policy where governments increase expenditure during recessions (supports that expansionary fiscal measures like tax cuts/spending rises are applied in downturns).

How to extend

Combine with the tax‑cut rule to expect fiscal stimulus (tax cuts + spending increases) and compare this to monetary policy actions to evaluate the consistency of rate increases in recessions.

Statement analysis

This statement analysis shows book citations, web sources and indirect clues. The first statement (S1) is open for preview.

Login with Google to unlock all statements.

Statement analysis

This statement analysis shows book citations, web sources and indirect clues. The first statement (S1) is open for preview.

Login with Google to unlock all statements.

Statement analysis

This statement analysis shows book citations, web sources and indirect clues. The first statement (S1) is open for preview.

Login with Google to unlock all statements.

How to study

This tab shows concrete study steps: what to underline in books, how to map current affairs, and how to prepare for similar questions.

Login with Google to unlock study guidance.

Micro-concepts

Discover the small, exam-centric ideas hidden in this question and where they appear in your books and notes.

Login with Google to unlock micro-concepts.

The Vault

Access hidden traps, elimination shortcuts, and Mains connections that give you an edge on every question.

Login with Google to unlock The Vault.

✓ Thank you! We'll review this.

SIMILAR QUESTIONS

IAS · 2010 · Q108 Relevance score: 0.93

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?

CDS-I · 2012 · Q22 Relevance score: -1.92

Which of the following measures should be taken when an eco- nomy is going through infla- tionary pressures ? 1. The direct taxes should be increased. 2. The interest rate should be reduced. 3. The public Spending should be increased. Select the correct answer using the codes given below—

IAS · 2013 · Q59 Relevance score: -2.20

Which one of the following is likely to be the most inflationary in its effect?

IAS · 1994 · Q35 Relevance score: -2.88

Which one of the following governmental steps has proved relatively effective in controlling the double-digit rate of inflation in the Indian economy during recent years ?