(C) Rule of people with freedom
Democracy is fundamentally based on the principle that people are the source of all political power and citizens enjoy freedom to govern themselves through institutions of self-government.
The passage from Chapter 1 clearly states: "One basic principle of democracy is that people are the source of all political power." Option (C) directly reflects this. Options (A), (B), and (D) describe dictatorship, monarchy, and military rule respectively — all non-democratic forms. Examiners expect you to pick the correct option and may ask for a one-line justification.