The correct answer is: C. effective stress and undrained strength increase with depth but water content decreases with depth.
In a deposit of normally consolidated clay, the effective stress increases with depth due to the weight of the overlying soil. The water content decreases with depth due to the upward movement of water by capillarity. The undrained strength increases with depth due to the increase in effective stress.
Option A is incorrect because the water content of soil does not decrease with depth. Option B is incorrect because the undrained strength does not decrease with depth. Option D is incorrect because the effective stress, water content, and undrained strength do not decrease with depth.