Expansionary Policies to Combat Deflation Steps:

• Deflation lowers prices; high debt-to-income ratio worsens real debt burden, requiring inflation to erode it.
• Increasing budget deficit raises aggregate demand via government spending or tax cuts.
• Increasing money supply lowers interest rates, encouraging investment and consumption to boost demand.
• Combined expansion maximizes price level rise through multiplicative effects on output and inflation.

Why B is correct:

• Quantity theory of money (MV = PY) shows increasing money supply (M) raises prices (P) if velocity (V) and output (Y) are stable; paired with deficit spending, it strongly shifts AD rightward without net debt addition via monetization.

Why the others are wrong:

• A: Both contractionary policies reduce AD, worsening deflation.
• C: Decreasing deficit contracts fiscal AD, offsetting monetary expansion's price effects.
• D: Deficit increases AD but shrinking money supply raises rates, contracting monetary AD and limiting price rise.

Final answer: B