Assertion (A): A rise in the fiscal deficit during a recession shows that the government has adopted a more expansionary fiscal policy.
Reason (R): In a recession, tax revenues fall because firms and households pay lower taxes when they earn less.
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → (A) is false but (R) is true.
Assertion (A): A rise in the fiscal deficit during a recession shows that the government has adopted a more expansionary fiscal policy. — False. The deficit can rise with no change in policy. Larger deficits do not always mean a more expansionary policy.
Reason (R): In a recession, tax revenues fall because firms and households pay lower taxes when they earn less. — True. Lower incomes bring in less tax, so the deficit rises on its own.
R in fact shows why A is wrong: the deficit grows in a recession and falls in a boom just because tax revenue changes.
NCERT (2026-27): “Deficit Reduction: … We must note that larger deficits do not always signify a more expansionary fiscal policy. The same fiscal measures can give rise to a large or small deficit, depending on the state of the economy. For example, if an economy experiences a recession and GDP falls, tax revenues fall because firms and households pay lower taxes when they earn less. This means that the deficit increases in a recession and falls in a boom, even with no change in fiscal policy.” |