Final answer:
Option A correctly explains how expansionary monetary policy works: An increase in money supply leads to lower interest rates, encouraging borrowing, which stimulates investment and consumption, resulting in increased economic output.
Step-by-step explanation:
The correct explanation of how expansionary monetary policy works is captured by option A: M↑ ⇒ i↓ = /u2191 ⇒ Y↑. This sequence translates to an increase in the money supply (M↑), which leads to a decrease in interest rates (i↓). Lower interest rates make borrowing cheaper, which can lead to increased investment and/or consumption (I/C↑), and ultimately results in an increase in overall economic output or GDP (Y↑).
Expansionary monetary policy is typically used to combat recessionary pressures by encouraging borrowing and spending in the economy. The policy shifts aggregate demand (AD) to the right, which, if maintained, increases GDP and employment. This continues until the economy reaches potential output; beyond that point, continued expansionary measures may only lead to inflation.