Deflation demands policies to stimulate spending and growth

Steps:

• Define deflation as a sustained drop in prices, often from low demand and excess savings.
• Identify policies that boost consumption, investment, or money supply to raise demand.
• Evaluate each option for alignment with increasing economic activity.
• Select the option that reduces spending as unhelpful.

Why A is correct:

• Encouraging savings over consumption lowers aggregate demand, per the Keynesian consumption function (C = a + bYd), exacerbating deflation by further reducing spending.

Why the others are wrong:

• B: Lowering profits tax spurs business investment, increasing production and demand.
• C: Lower rates and more money supply ease borrowing, stimulating spending via monetary policy.
• D: Innovation drives productivity and growth, raising output and countering price falls.

Final answer: A