UPSC Prelims PYQ 2010: Fiscal stimulus measures during recession

Consider the following actions by the Government:

1. Cutting the tax rates
2. Increasing the government spending
3. Abolishing the subsidies

In the context of economic recession, which of the above actions can be considered as part of the fiscal stimulus package?

1. 1 and 2 only
2. 2 only
3. 1 and 3 only
4. 1, 2 and 3

Explanation

Option (a) is correct

• Fiscal stimulus refers to expansionary fiscal policy used during economic recessions to boost aggregate demand. Cutting tax rates increases disposable income and consumption. Increasing government spending directly injects demand into the economy. Abolishing subsidies is a contractionary measure. Removing subsidies reduces financial support, potentially increasing costs for consumers and businesses, which can further dampen demand during a recession.

Answer: (a) 1 and 2