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:

Option 1 -> GDP cannot rise immediately after the policy decision; it's an eventual outcome.

Option 2 -> This follows the correct economic chain: First, fiscal policy is implemented (A), leading to increased purchasing power (D), which boosts aggregate demand (C), and finally results in GDP growth (B).

Option 3 -> GDP rising before implementing the deficit budget policy is illogical.

Option 4 -> This reverses the cause-and-effect relationship incorrectly.

Hence, Option 2: (A), (D), (C), (B) -> In a deficit budget during recession, the government first implements expansionary fiscal policy by reducing taxes and increasing public spending (A). This directly increases disposable income and purchasing power of people (D). With more purchasing power, consumers spend more, causing aggregate demand to rise (C). Finally, the increased aggregate demand stimulates production and economic activity, leading to GDP growth (B). This sequence represents the Keynesian transmission mechanism of fiscal policy during recession. -> correct