UPSC Prelims 2021 · GS Paper I

Question 3: Economy and Social Development

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

aCut in tax rates accompanied by increase in interest rate

bIncrease in expenditure on public projects

cIncrease in tax rates accompanied by reduction of interest rate

dReduction of expenditure on public projects

AnswerUPSC’s answer is (b).

In a recession demand falls and unemployment rises, so governments use expansionary policy: higher public spending, lower taxes and lower interest rates. More spending on public projects creates demand and jobs directly and has a multiplier effect on income. Cutting spending, raising taxes or raising interest rates all pull demand down further and deepen the slump. Remember: recession means expand; boom or high inflation means contract.

Why each option is right or wrong

(a) Wrong: a tax cut helps, but a higher interest rate discourages borrowing and investment, so the package pulls against itself.
(b) Right: public spending adds demand and jobs directly during a downturn.
(c) Wrong: higher taxes cut disposable income, which is contractionary and works against the lower rate.
(d) Wrong: cutting public spending reduces demand further and worsens the recession.

Answer: UPSC’s key. Explanation: written by UPSC Grade, not by UPSC.

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Source: UPSC, Civil Services (Preliminary) Examination 2021, General Studies Paper I, Series A. The paper on upsc.gov.in.