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

Correct Answer: Increase in expenditure on public projects.

Understanding Economic Recession:

An economic recession is a significant decline in economic activity spread across the economy, lasting more than a few months. During a recession, consumer spending decreases, businesses lower their investment, unemployment rises, and aggregate demand drops significantly.

Role of Expansionary Fiscal Policy:

To combat a recession, government intervention is required to stimulate economic growth. This is typically done using expansionary fiscal policy. One of the most effective measures of expansionary fiscal policy is for the government to increase its expenditure on public projects such as infrastructure, roads, schools, and hospitals.

Why this step is effective:

1. Direct Demand Creation: When the government invests in public projects, it directly creates jobs, increasing employment opportunities.
2. Increased Household Income: Newly employed individuals earn incomes, which enhances their purchasing power.
3. Multiplier Effect: Higher spending by workers boosts demand for goods and services across various sectors, encouraging private businesses to expand production and hire more staff.

Analysis of Other Options:

• Cut in tax rates accompanied by increase in interest rate: While cutting tax rates boosts disposable income, increasing interest rates makes borrowing more expensive, which counteracts economic stimulus.
• Increase in tax rates accompanied by reduction of interest rate: Increasing tax rates reduces disposable income and dampens spending, which worsens a recession.
• Reduction of expenditure on public projects: Cutting government spending reduces economic activity and increases unemployment, further deepening the recession.

Therefore, an increase in expenditure on public projects is the most suitable and effective measure to revive an economy during a recession.