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If a government wants to boost economic growth in a recession, which measure is it likely to take?
Reduce public spending
Implement strict trade barriers
Increase public spending
Increase taxes significantly
Increase public spending
To stimulate economic growth during a recession, the government employs expansionary fiscal policy by increasing public expenditure. This injection of funds into the economy increases aggregate demand, creates jobs, and compensates for the decline in private sector investment.
To stimulate economic growth during a recession, the government employs expansionary fiscal policy by increasing public expenditure. This injection of funds into the economy increases aggregate demand, creates jobs, and compensates for the decline in private sector investment.
The concept of fiscal policy is managed by the Ministry of Finance, Government of India, under the framework of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003.
Expansionary fiscal policy involves higher government spending or lower taxes to stimulate growth.
During a recession, the multiplier effect of government spending helps push the economy toward full employment.
Keynesian economics advocates for government intervention through deficit spending when private demand is insufficient.
Increased public spending stimulates infrastructure development, which serves as a force multiplier for long-term GDP growth.
Option A (Reduce public spending) is a contractionary policy used to curb high inflation, not to fix a recession.
Option D (Increase taxes) reduces disposable income and aggregate demand, which would worsen a recessionary environment.
Fiscal policy is distinct from Monetary Policy, which is controlled by the Reserve Bank of India (RBI) via interest rate adjustments.
C is correct тАФ Increasing public spending acts as an economic stimulus to boost aggregate demand and encourage recovery.
Link this to Monetary Policy: While Fiscal Policy (Govt) uses spending, Monetary Policy (RBI) uses the Repo Rate to manage growth. In a recession, both typically move in tandemтАФGovernment increases spending and RBI reduces interest rates.
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