Q. Which among the following steps is most likely to be taken at the time of an economic recession?
- Cut in tax rates accompanied by increase in interest rate
- Increase in expenditure on public projects
- Increase in tax rates accompanied by reduction of interest rate
- Reduction of expenditure on public projects
Answer: b) Increase in expenditure on public projects
Recession
- A recession is a nationwide economic slowdown, measured by factors such as industrial production, employment and income.
- A recession typically involves the overall output in an economy contracting for at least two consecutive quarters, along with job losses and reduction in overall demand.
- There are a variety of reasons recessions take place.
- Some are associated with sharp changes in the prices of the inputs used in producing goods and services.
- For example, a steep increase in oil prices can be a harbinger of a recession. As energy becomes expensive, it pushes up the overall price level, leading to a decline in aggregate demand.
- A recession can also be triggered by a country’s decision to reduce inflation by employing contractionary monetary or fiscal policies. When used excessively, such policies can lead to a decline in demand for goods and services, eventually resulting in a recession.
- Some are associated with sharp changes in the prices of the inputs used in producing goods and services.
- Here are three common causes of recession:
- Oversupply. In an economic boom, companies tend to increase production to meet consumer demand. When demand peaks and starts to decline, the excessive supply of goods and services that aren’t consumed can lead to a recession, with companies producing less and downsizing while people lose purchasing power and consumption continues to fall.
- Uncertainty. Not knowing how the economy will change makes business decision-making riskier. Wars and pandemics are two situations that can make consumer trends unpredictable in the short, medium and long term, thus generating economic uncertainty. Because businesses and people hold off on spending and investment decisions, economic activity declines.
- Speculation. In general, economic bubbles form when the price of something suddenly rises due to speculation, market trends or consumer confidence. Investors buy it up, hoping to earn a return from the price increase. However, when they start to sell it off, supply exceeds demand (i.e. there are fewer new buyers) and drives prices down, causing the bubble to burst. This happened with tulips in the 17th century and the housing market in 2008.
- During a recession, businesses may sell fewer products, leading to layoffs and decreased wages. As a result, consumers tend to save their money rather than spend it, further dampening their contribution to the economy. This domino effect creates financial hardships that can affect the entire world.
- Governments respond to these recessions by altering fiscal policies to boost economic growth. The following are some measures policymakers may implement to deal with a recession:
- Increasing government spending
- Lowering interest rates
- Implementing tax cuts
- Increasing money supply
