Deregulation and fiscal expansion shift both AS and AD rightward

Steps:

• Reducing regulations lowers business costs, shifting short-run AS right from AS1 to AS2.
• Increasing government expenditure by 1.5% boosts AD, shifting it right from AD1 to AD2.
• The combined rightward shifts increase equilibrium output from Y1 to Y2.
• New equilibrium at intersection of AD2 and AS2, labeled point C on the diagram.

Why C is correct:

• Point C reflects higher output and stable price level from balanced AD and AS shifts, per the AD-AS model.

Why the others are wrong:

• A: Shows only AD shift, ignoring AS effect, leading to higher prices.
• B: Depicts only AS shift, understating output growth from fiscal policy.
• D: Indicates leftward shifts, contradicting stimulatory policies.

Final answer: C