Question

Why does government spending on public works act as an effective measure during a depression?

Options

• It replaces private firms permanently

• It works through the multiplier effect, where each rupee spent generates multiple rupees of income

• It directly increases the rate of interest to attract savings

• It reduces wages of workers to lower production costs

Answer 1

It works through the multiplier effect, where each rupee spent generates multiple rupees of income

Explanation:

During a depression, the government spends on infrastructure like dams, housing, and roads to fill the investment gap. This spending triggers the multiplier effect, generating rounds of additional income and employment throughout the economy.