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

Correct Option

During an economic recession, a government typically implements expansionary fiscal policies to stimulate aggregate demand and economic activity. Increasing expenditure on public projects, such as infrastructure development, social services, or employment generation schemes, directly injects money into the economy. This boosts employment, income, and consumption, thereby counteracting the recessionary trend.

Incorrect Options

Option (A): A cut in tax rates is an expansionary fiscal measure that can stimulate demand. However, an increase in interest rates makes borrowing more expensive, discouraging investment and consumption. This contractionary monetary policy would counteract the positive effect of tax cuts and further dampen economic activity during a recession.

Option (C): An increase in tax rates reduces disposable income for individuals and profits for businesses, leading to decreased consumption and investment. This is a contractionary fiscal policy that would worsen a recession. While a reduction in interest rates is an expansionary monetary policy, the negative impact of increased taxes would likely dominate during a recession.

Option (D): A reduction of expenditure on public projects is a contractionary fiscal policy. It would decrease government spending, leading to a fall in aggregate demand, reduced employment, and lower economic output. This would exacerbate the recession rather than mitigate it.