Due to recessionary pressure in an economy, suppose the government plans a deficit budget for a given financial year. Identify the correct sequence in which this will affect the economy.

(A) Taxes will be reduced, and public spending will increase.
(B) GDP will start rising.
(C) Aggregate demand will rise.
(D) The purchasing power of the people will increase.

Choose the correct answer from the options given below:

(A), (D), (C), (B)

The correct answer is Option (2) → (A), (D), (C), (B)

1. (A) Taxes will be reduced, and public spending will increase. A deficit budget means government spending ($G$) is greater than tax revenue ($T$). This is the deliberate policy action taken by the government to combat the recession.

2. (D) The purchasing power of the people will increase. The policy actions in (A)—lower taxes mean people keep more of their income, and higher public spending (e.g., welfare, subsidies, government jobs) means more income is injected into the economy. Both of these directly increase the disposable income and, thus, the purchasing power of households and businesses.

3. (C) Aggregate demand will rise. The increase in purchasing power (D) leads to an increase in consumption ($C$) and investment ($I$) by the private sector. Since Aggregate Demand (AD) is $C+I+G+(X-M)$, and both $C$, $I$, and the government's own spending ($G$) have increased, the overall Aggregate Demand in the economy will rise.

4. (B) GDP will start rising. The rise in Aggregate Demand (C), when the economy is in a recession (meaning there is idle capacity and unemployment), leads to businesses increasing production to meet the new demand. This increased production translates directly into a rise in the country's Gross Domestic Product (GDP).