Expansionary Policies to Boost Demand and Prevent Deflation

Steps:

• Deflation occurs when prices fall due to weak aggregate demand; prevention requires expansionary monetary and fiscal policies.
• Expansionary monetary policy increases money supply to lower interest rates and encourage borrowing/spending.
• Expansionary fiscal policy raises government spending and cuts taxes to directly boost demand.
• Evaluate options for the most comprehensive expansionary mix.

Why C is correct:

• C combines increasing money supply (monetary expansion) with rising government spending and falling taxes (fiscal expansion), raising aggregate demand per Keynesian economics to counteract deflationary pressures.

Why the others are wrong:

• A: All contractionary measures (decreasing money supply/spending, increasing taxes) reduce demand and risk deepening deflation.
• B: Decreasing money supply is contractionary, offsetting fiscal expansions and failing to fully prevent deflation.
• D: Increasing taxes contracts fiscal policy, counteracting monetary and spending expansions to limit anti-deflation impact.

Final answer: C