Detailed Explanation:

Answer: Option 2 — Increase in expenditure on public projects.

During an economic recession, governments adopt expansionary fiscal policy to stimulate demand and revive economic activity. Increasing expenditure on public projects is a classic Keynesian measure that directly injects money into the economy, creates employment opportunities, generates demand for goods and services, and has a multiplier effect on overall economic growth.

Why other options are less suitable:
❌ Option 1 – Cut in tax rates with increase in interest rate: While tax cuts increase disposable income, raising interest rates simultaneously discourages investment and consumption, creating contradictory effects.
❌ Option 3 – Increase in tax rates with reduction of interest rate: Higher taxes reduce disposable income and dampen consumer demand, which is counterproductive during a recession despite lower interest rates.
❌ Option 4 – Reduction of expenditure on public projects: This represents contractionary fiscal policy, which would further deepen the recession by reducing aggregate demand and employment.

📝 Short Notes: Fiscal Policy During Economic Recession

• Expansionary Fiscal Policy: Involves increased government spending and/or tax cuts to boost aggregate demand during recessions.
• Keynesian Economics: Advocates active government intervention through public expenditure to counter cyclical downturns.
• Multiplier Effect: Government spending on projects creates jobs → workers spend income → businesses earn more → hire more workers, creating cascading positive effects.
• Automatic Stabilizers: Progressive taxation and unemployment benefits automatically stabilize the economy without policy changes.
• Discretionary Measures: Deliberate policy actions like infrastructure projects, stimulus packages, and public works programs.
• Fiscal Deficit: During recessions, governments accept higher deficits to prioritize growth over fiscal consolidation in the short term.