Boosting Aggregate Demand to Counter Deflation

Steps:

• Identify deflation as a sustained decrease in general price levels, often due to weak demand.
• Recognize that preventing deflation requires policies increasing aggregate demand (AD) via consumption, investment, or government spending.
• Evaluate options: A controls prices downward (worsens deflation); B reduces disposable income (lowers AD); C mildly boosts consumption but is limited; D enhances investment (strongly raises AD).
• Select D as it directly stimulates economic activity to push prices up.

Why D is correct:

• Deflation prevention relies on raising AD (AD = C + I + G + NX); D encourages investment (I), shifting AD rightward per Keynesian economics, stabilizing prices.

Why the others are wrong:

• A: Price ceilings on goods reduce supply incentives, exacerbating shortages and deflationary pressures.
• B: Higher taxes and borrowing cut consumer spending and crowd out private investment, contracting AD.
• C: Sales tax cuts slightly increase consumption (C) but fail to address investment uncertainty, offering weaker AD stimulus.

Final answer: D