What is the right course of action in this situation?

Remaining behind the tram is correct because a tram is treated like rail-bound traffic that cannot swerve, needs extra space to brake, and may stop unexpectedly at tram stops. In Germany you should only pass a tram if it is clearly permitted and safe, and even then you must follow special rules about where you are allowed to pass.

Passing on the right is normally not allowed because, in general, overtaking must be done on the left. Passing on the right is only allowed in a few special situations (for example in clearly separated lanes in slow-moving traffic), and a tram situation like this is typically not one of them.

Overtaking the tram on the left is also not the correct “standard action” here, because you may be approaching a stop, passengers could appear, and you must not endanger or obstruct the tram. Many exam questions expect the safe rule of thumb: if there is any doubt with a tram (stop ahead, unclear space, or you would need to change lanes), stay behind and be prepared for it to stop.

Rule of thumb for similar questions: With trams, drive defensively, expect stops and passengers, keep your distance, and only pass when it’s explicitly safe and clearly allowed by the road layout and traffic situation.