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

The correct answer is B. A recession means aggregate demand is falling, output is shrinking and unemployment is rising. The remedy is expansionary fiscal policy, where the government spends more to put money back into the economy. Higher public spending on roads, railways, housing and other projects creates jobs and income, and that income is spent again, so the multiplier effect pushes demand up.

Why the others fail:

• A pairs a tax cut, which is the right direction, with a rise in interest rates. Higher rates make borrowing costlier for firms and households, which slows investment exactly when it needs to revive.
• C raises taxes during a slump, which drains spending power, and a rate cut alone cannot offset that.
• D cuts public spending in a downturn. This is pro-cyclical and deepens the contraction.

Core concept: fiscal policy and the multiplier. For Mains (GS-III), this links to the debate on fiscal stimulus versus fiscal discipline under the FRBM framework, where the 2008 and 2020 responses are useful examples.

Trap: candidates pick A because a tax cut sounds right, but they overlook the interest rate half of the option. Always check every component of a combined option.