Expansionary Policies to Boost Aggregate Demand Against Deflation

Steps:

• Deflation involves falling prices and reduced aggregate demand, requiring policies to stimulate spending and investment.
• Expansionary monetary policy reduces interest rates, lowering borrowing costs to encourage consumption and business expansion.
• Expansionary fiscal policy increases government spending or cuts taxes, directly injecting money into the economy.
• Combining both policies maximizes demand stimulation for effective deflation reversal.

Why D is correct:

• Both policies expand aggregate demand (AD = C + I + G + NX), countering deflation per Keynesian stabilization theory.

Why the others are wrong:

• A: Both contractionary policies reduce AD, exacerbating deflation.
• B: Higher interest rates curb investment, offsetting fiscal stimulus and weakening overall impact.
• C: Reduced government spending or higher taxes dampen demand, countering monetary easing.

Final answer: D