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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.

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Each bar shows the % of students who chose that option. Green bar = correct answer, blue outline = your choice.
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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
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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 2
Are increases in government expenditure on public projects (fiscal stimulus) commonly implemented as a policy response during an economic recession?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > Fiscal Stimulus > p. 117
Presence: 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 this source?
  • Defines fiscal stimulus as government attempts to financially stimulate the economy during a recession.
  • Lists increasing government spending as a specific tactic used to implement fiscal stimulus.
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > Counter-Cyclical Fiscal Policy > p. 124
Presence: 5/5
“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 this source?
  • Describes counter-cyclical fiscal policy where the government makes excess expenditure during recessions.
  • Explicitly states greater public expenditure and job creation are paramount in economic recession.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Fiscal Policy can be either expansionary or contractionary. > p. 154
Presence: 5/5
“Pumping money into the economy by decreasing tax level and increasing government spending is also known as pump priming. With more money in the economy and fewer taxes to pay, consumer demand for goods and services increases. This in turn rekindles businesses and turns the cycle around from stagnant to active.• Contractionary fiscal policy: In case of contractionary fiscal policy, Govt. reduces spending and increases tax levels to suck the money out of economy and hence reduces the aggregate demand. For example, when the inflation in the economy is high, the economy may need a slowdown. In such a situation, the government can use its fiscal policy to decrease public spending and increase taxes to suck money out of the economy”
Why this source?
  • Explains 'pump priming' as decreasing taxes and increasing government spending to boost demand.
  • Shows the mechanism by which higher government expenditure rekindles business activity in a slowdown.
Statement analysis

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Statement 3
Are increases in tax rates combined with reductions in interest rates commonly implemented as policy responses during an economic recession?
Origin: Web / Current Affairs Fairness: CA heavy Web-answerable

Web source
Presence: 5/5
"underpinned a cut in the country’s policy interest rate by 200 bp to 13.0 per cent. Similarly, Israel’s central bank announced a reduction in its policy interest rate by 75 bp to 1.0 per cent, bringing the aggregate cut in interest rates to 325 bp since September of last year."
Why this source?
  • Gives concrete examples of policy interest-rate cuts taken in response to slowing economic activity.
  • Shows that reductions in policy interest rates are a common monetary response to economic downturns.
Web source
Presence: 4/5
"Figures 6a & 6b reveal a declining trend in statutory corporate tax rates, the average CIT rate dropping from about 31% in the mid-1990s to 26% in 2007."
Why this source?
  • Documents a broad, historical trend of declining statutory corporate tax rates (i.e., tax-rate reductions).
  • Implies that tax policy in many countries tends toward cutting rates rather than increasing them.
Web source
Presence: 4/5
"changes in tax structure, especially reductions in marginal tax rates are largely responsible for the perverse rise in executive salaries since the 1980s."
Why this source?
  • States explicitly that reductions in marginal tax rates were used historically (not increases).
  • Reinforces that tax-policy responses documented in the sources are cuts, not rises, contrasting with the statement's premise.

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

Defines fiscal stimulus and lists typical tactics to kickstart growth in a recession, including lowering interest rates and government spending (and reducing taxes).

How to extend

A student could note that lowering interest rates is a common recession response, so pairing that with an observed opposite tax move (tax increases) would be atypical and worth investigating against country practice.

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

Explains that tax decreases and higher expenditure soften recessions (expansionary), whereas tax increases deepen recessions (contractionary).

How to extend

Using this rule, a student could infer that raising tax rates during recession would usually be counterproductive, so combined with rate cuts it would be a mixed/contradictory policy mix to verify with empirical examples.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.28 Liquidity Trap > p. 111
Strength: 4/5
“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

Describes central bank behaviour in recession: reducing repo/interest rates to increase money supply and push demand.

How to extend

A student could treat interest-rate cuts as a standard monetary response and then compare whether fiscal policy in practice (tax hikes vs. cuts) typically aligns or contradicts that monetary stance in historical recessions.

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

Articulates the counter‑cyclical fiscal policy principle: governments should increase public spending during recessions and tighten during booms (implying restraint, not tax hikes, during downturns).

How to extend

A student could apply the counter‑cyclical norm to expect tax cuts or increased spending in recessions, making tax increases paired with rate cuts appear inconsistent with the norm and prompting examination of exceptions.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 16: Terminology > 16 Terminology > p. 456
Strength: 3/5
“• Ever-greening of Loans: It is a practice whereby banks extend even more loans to debt-laden companies to help them repay previous loans.• Financial repression: It occurs when governments implement policies to channel to themselves funds that in a deregulated market environment would go elsewhere.• Fiscal Drag: It is a situation where income growth or inflation moves taxpayers into higher tax brackets. This in effect increases government tax revenue without actually increasing tax rates. The increase in taxes reduces aggregate demand and consumer spending because a larger share of the people's income now goes into taxes, which leads to deflationary pressures or drag on the economy.”
Why relevant

Defines 'fiscal drag' and notes that increases in taxes reduce aggregate demand and act as a drag on the economy.

How to extend

A student can combine this with the fact that recessions involve weak demand to reason that raising taxes during a recession would normally worsen demand, so observing tax rises with rate cuts would be a policy mismatch to investigate.

Statement analysis

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Statement 4
Are reductions in government expenditure on public projects commonly implemented as a policy response during an economic recession?
Origin: Web / Current Affairs Fairness: CA heavy Web-answerable

Web source
Presence: 5/5
"Some of these reductions reflect shifts in responsibility for expenditure from central government to state and local governments; more often they have been genuine cuts, prompted by economic crises or changes in political regime."
Why this source?
  • Explicitly states that reductions in real government spending have been common and that many were "prompted by economic crises."
  • Directly links economic crises to genuine cuts in government expenditure rather than just reallocation.
Web source
Presence: 5/5
"Much of the fiscal tightening is expected to come through reduced expenditure on public sector wages and benefits, reductions in the overall level of social expenditure, revised indexation arrangements for social transfers, and a postponement of a planned increased in the minimum wage."
Why this source?
  • Describes fiscal tightening during crises that operates through reduced expenditure on public sector wages, benefits, and social spending.
  • Shows specific categories of public spending that are cut as part of policy responses.
Web source
Presence: 5/5
"included cuts in government consumption and public investment; reductions in transfers, including more restrictive policies on employers’ pension contributions; support allowances; and public service pensions. Spending cuts (planned or immediately implemented) between 2010 and 2014 amounted to 2.9 percent of GDP—about 0.6 percent a year on average."
Why this source?
  • Provides concrete examples of post-crisis spending cuts, including cuts in government consumption and public investment and reductions in transfers and pensions.
  • Quantifies the magnitude of spending cuts implemented in the aftermath of economic downturns (e.g., 2.9 percent of GDP between 2010–2014).

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > Counter-Cyclical Fiscal Policy > p. 124
Strength: 5/5
“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

States the concept of counter‑cyclical fiscal policy: governments make excess expenditure during recessions and restrain expenditure in booms.

How to extend

A student could combine this with basic knowledge of recessions to infer that cutting public projects is not the typical response in a recession.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Findings from previous years Economic Surveys > p. 159
Strength: 5/5
“While counter-cyclical fiscal policy is necessary to smooth out economic cycles, it becomes critical during an economic crisis. This is because fiscal multipliers (the effect of Govt. expenditure on GDP growth) are greater during economic crisis.• Most of the studies concur that fiscal policies are considerably more effective in recessions than in expansions.• Studies have established that following a pro-cyclical fiscal stance leads to lower economic growth, higher volatility in output and higher levels of inflation. In contrast a counter-cyclical fiscal policy stance with policy actions against the cycle acts as a stabilizer by reducing output volatility and keeping growth on a steady path.”
Why relevant

Notes that fiscal policy is more effective in recessions and that a counter‑cyclical stance (increasing spending in downturns) stabilizes output.

How to extend

Using this rule, one could judge that reducing public project spending would contradict the effective counter‑cyclical approach during a recession.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > Fiscal Stimulus > p. 117
Strength: 4/5
“• 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

Defines fiscal stimulus as actions to kickstart growth in a recession, including increasing government spending.

How to extend

A student could use this example of stimulus tools to expect spending increases rather than reductions on public projects in recessions.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > Measures to Check Fiscal Deficit > p. 111
Strength: 4/5
“• By reducing public expenditure through: 1. • (a) Rationalisation of subsidies.• (b) Reduction in revenue expenditure in terms of bonus, LTC, leaves encashment, etc. to Government employees.• Curtailing other avoidable revenue expenditure. (c)• 2.By increasing revenue through: • (a) Increasing the tax base in the economy.• Checking tax evasion”
Why relevant

Lists reducing public expenditure (e.g., rationalising subsidies, cutting revenue expenditure) as a measure to check fiscal deficit.

How to extend

Combined with knowledge that some governments prioritise debt sustainability, one could infer that spending cuts may be used even in recessions under fiscal constraints.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > FISCAL CONSOLIDATION > p. 114
Strength: 4/5
“2. • On the expenditure front, rationalisation of subsidies, tackling leakages though digitalization 3. and allocation of resources to priority and strategic sectors. It is of great importance that reduction in fiscal deficit should not be achieved by reduction in capital expenditure. > Reduction in the revenue expenditure should be targeted to achieve better results of fiscal consolidation.”
Why relevant

On fiscal consolidation it warns that reduction in fiscal deficit should not be achieved by cutting capital expenditure (i.e., public investment).

How to extend

A student could extend this to reason that while cuts to some expenditures occur, cuts to public projects (capital spending) are discouraged even when consolidating, so reductions may be uncommon or targeted elsewhere.

Statement analysis

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Pattern takeaway: UPSC has moved from 'What is X?' to 'When to use X?'. The pattern is Policy Application. They will give you a scenario (Inflation, Recession, Rupee Depreciation) and ask for the correct policy intervention.
How you should have studied
  1. [THE VERDICT]: Sitter. Directly solvable from NCERT Class XII Macroeconomics (Chapter 5) or Vivek Singh/Singhania under 'Fiscal Policy'.
  2. [THE CONCEPTUAL TRIGGER]: Counter-Cyclical Fiscal Policy. The Economic Survey 2020-21 heavily emphasized that during a slowdown, the Govt must spend more (counter-cyclical) rather than tighten the belt.
  3. [THE HORIZONTAL EXPANSION]: Memorize the 'Recession Toolkit': 1. Fiscal: Increase Spending, Cut Taxes (Deficit Financing). 2. Monetary: Cut Repo/CRR/SLR, Open Market Operations (Buy Bonds). 3. Concepts: Fiscal Multiplier (Spending > Tax cuts), Liquidity Trap (when rate cuts fail), Crowding In (Govt spending boosting private inv in recession).
  4. [THE STRATEGIC METACOGNITION]: Stop memorizing definitions. Start role-playing. Ask: 'If I were the RBI Governor or Finance Minister today, what buttons would I press to boost demand?' Map every tool (Repo, Tax, Expenditure) to its impact on Aggregate Demand.
How to study

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Concept hooks from this question
📌 Adjacent topic to master
S1
👉 Fiscal stimulus and tax cuts
💡 The insight

Cutting taxes is used as a fiscal tool to boost aggregate demand and soften a recession.

High-yield for UPSC: appears in questions on fiscal policy, budgetary responses to downturns and public finance trade-offs. Connects to debates on deficit management, stimulus composition (tax cuts vs. spending), and counter-cyclical policy. Useful for answering policy-evaluation and recommendation questions.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Fiscal Policy can be either expansionary or contractionary. > p. 155
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > Counter-Cyclical Fiscal Policy > p. 124
🔗 Anchor: "Are cuts in tax rates combined with increases in interest rates commonly impleme..."
📌 Adjacent topic to master
S1
👉 Monetary easing — interest rate cuts in recessions
💡 The insight

Central banks typically reduce policy (repo) rates to increase money supply and stimulate demand during a recession.

Essential for monetary policy and macroeconomics questions: explains transmission to lending rates, effects on investment and consumption, and interaction with fiscal measures. Enables analysis of coordinated monetary–fiscal responses and limits of monetary policy in liquidity traps.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.28 Liquidity Trap > p. 111
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > Transmission of Repo Rate into Lending Rate > p. 89
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > Fiscal Stimulus > p. 117
🔗 Anchor: "Are cuts in tax rates combined with increases in interest rates commonly impleme..."
📌 Adjacent topic to master
S1
👉 Counter‑cyclical fiscal policy (increased public spending during downturns)
💡 The insight

Governments adopt higher public expenditure and job-creation measures in recessions and tighten in booms to smooth cycles.

Core for UPSC: links fiscal strategy to debt sustainability, growth and employment policy. Helps answer questions on Economic Survey recommendations, IRGD (interest rate–growth differential), and designing stimulus packages.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > Counter-Cyclical Fiscal Policy > p. 124
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Findings from previous years Economic Surveys > p. 159
  • Macroeconomics (NCERT class XII 2025 ed.) > Chapter 5: Government Budget and the Economy > Debt > p. 80
🔗 Anchor: "Are cuts in tax rates combined with increases in interest rates commonly impleme..."
📌 Adjacent topic to master
S2
👉 Counter-cyclical fiscal policy
💡 The insight

Counter-cyclical fiscal policy requires the government to increase spending during recessions and tighten during booms.

High-yield for UPSC: essential for questions on macroeconomic stabilisation and budgetary stance. Connects to topics like fiscal consolidation, business cycles, and public debt management; enables analysis of when to expand or contract government spending.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > Counter-Cyclical Fiscal Policy > p. 124
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Findings from previous years Economic Surveys > p. 159
🔗 Anchor: "Are increases in government expenditure on public projects (fiscal stimulus) com..."
📌 Adjacent topic to master
S2
👉 Fiscal stimulus (pump-priming)
💡 The insight

Fiscal stimulus or pump-priming uses higher public expenditure and tax cuts to boost aggregate demand in a recession.

Frequently tested in policy-response questions and essays; links Keynesian policy to practical budget measures and public investment programmes. Helps frame specific policy prescriptions and evaluate trade-offs.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > Fiscal Stimulus > p. 117
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Fiscal Policy can be either expansionary or contractionary. > p. 154
🔗 Anchor: "Are increases in government expenditure on public projects (fiscal stimulus) com..."
📌 Adjacent topic to master
S2
👉 Fiscal multipliers and crisis effectiveness
💡 The insight

Fiscal multipliers tend to be larger during crises, making government expenditure more effective in stimulating growth in recessions.

Important for evaluating the size and expected impact of stimulus packages; connects macroeconomic theory to empirical policy outcomes and assessment of fiscal interventions.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Findings from previous years Economic Surveys > p. 159
  • Macroeconomics (NCERT class XII 2025 ed.) > Chapter 5: Government Budget and the Economy > Debt > p. 80
🔗 Anchor: "Are increases in government expenditure on public projects (fiscal stimulus) com..."
📌 Adjacent topic to master
S3
👉 Counter‑cyclical fiscal policy
💡 The insight

Governments adopt counter‑cyclical fiscal measures—higher spending during recessions and restraint during booms—rather than raising taxes in downturns.

High‑yield for UPSC: explains government behaviour in crises (e.g., stimulus vs consolidation), links public finance to macroeconomic stabilisation, and helps answer policy‑oriented essays and mains questions on fiscal responses to downturns.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > Counter-Cyclical Fiscal Policy > p. 124
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Fiscal Policy can be either expansionary or contractionary. > p. 155
🔗 Anchor: "Are increases in tax rates combined with reductions in interest rates commonly i..."
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🌑 The Hidden Trap

The 'Liquidity Trap'. Since this question covers standard recession response, the logical sibling is the scenario where this response FAILS—i.e., when interest rates are near zero but demand doesn't pick up (Keynesian Liquidity Trap).

⚡ Elimination Cheat Code

The 'Brake vs. Accelerator' Logic. Recession means the car has stopped. You need the accelerator.
Option A: Accelerator (Tax cut) + Brake (Rate hike). Contradictory.
Option C: Brake (Tax hike) + Accelerator (Rate cut). Contradictory.
Option D: Brake (Cut spending). Suicidal.
Option B: Accelerator (Increase spending). Pure acceleration. Pick the option with consistent direction.

🔗 Mains Connection

Mains GS3 (Fiscal Policy): Link this to the 'Escape Clause' in the FRBM Act. The Act allows the government to breach fiscal deficit targets during 'structural collapse' or 'national calamity'—exactly to fund the 'Increase in expenditure' mentioned in Option B.

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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 ?