Expansionary monetary policy to shift AD right and raise prices

Steps:

• Identify deflation cause: asset price collapse reduces wealth/confidence, lowering AD.
• Select policy to boost AD: decreasing interest rates encourages borrowing/investment, restoring confidence.
• Match to diagram: Y shows AD shift right, raising price level P from P1 to P2 and GDP from Y1 to Y2.
• Confirm outcome: This counters deflation by increasing prices and output.

Why A is correct:

• Lower interest rates expand money supply, shifting AD right per the AD-AS model, directly addressing wealth/confidence via stimulated spending.

Why the others are wrong:

• B: Increasing corporation tax contracts AD by reducing firm profits/investment, worsening deflation.
• C: Reducing corporation tax shifts AD right but doesn't target asset prices/confidence like monetary policy; mismatches diagram Z (likely AS shift).
• D: Same as C; incorrect diagram and less direct for wealth restoration.

Final answer: A