Expansionary policy boosts demand to raise inflation against deflation

Steps:

• Deflation is falling prices; central banks counter it by increasing money supply via expansionary policy.
• This lowers interest rates, encouraging borrowing and spending.
• Higher spending increases aggregate demand.
• Rising demand pushes prices up, leading to inflation.

Why B is correct:

• Expansionary monetary policy increases money supply, which, per the quantity theory of money (MV = PY), raises price levels (inflation) when output is near potential.

Why the others are wrong:

• A: Expansionary policy lowers interest rates, reducing borrowing costs.
• C: Lower rates weaken the currency, causing depreciation, not appreciation.
• D: This affects fiscal policy; monetary policy doesn't directly increase government debt.

Final answer: B