Expansionary Monetary Policy Boosts Demand to Fight Deflation

Steps:

• Deflation is falling prices, often from weak demand, so central banks use expansionary policy like lowering interest rates or buying bonds.
• This increases money supply, making borrowing cheaper and encouraging spending and investment.
• Cheaper credit stimulates consumption and business activity, shifting the aggregate demand curve rightward.
• Higher demand raises prices, countering deflation without immediate inflation risks.

Why B is correct:

• Expansionary policy directly increases aggregate demand by lowering interest rates, per the IS-LM model, where reduced rates boost investment and consumption.

Why the others are wrong:

• A: Expansionary policy lowers borrowing costs, not raises them.
• C: It typically causes currency depreciation by increasing money supply and lowering rates.
• D: This relates to fiscal policy, not monetary actions by the central bank.

Final answer: B