Question 25

The aggregate demand curve shifts to the right.

When the government conducts an expansionary fiscal policy, it typically increases spending or reduces taxes, which boosts overall demand in the economy. This increase in demand is represented by a rightward shift of the aggregate demand curve.

A) Remains the same

This option is incorrect because an expansionary fiscal policy inherently alters the level of aggregate demand in the economy. If the aggregate demand curve remained the same, it would imply that government actions had no effect on economic activity, which contradicts the principles of expansionary fiscal policy.

B) Shifts to the right

This option is correct as it accurately reflects the impact of expansionary fiscal policy. Increased government spending or decreased taxes raises disposable income for consumers and increases consumption, leading to a rightward shift in the aggregate demand curve.

C) Becomes vertical

This option is incorrect because a vertical aggregate demand curve would indicate that changes in price levels do not affect the quantity of goods demanded. Expansionary fiscal policy, however, is aimed at increasing demand, which is contrary to the concept of a vertical curve.

D) Shifts to the left

This option is incorrect as it suggests a decrease in aggregate demand, which is the opposite of what occurs during an expansionary fiscal policy. A leftward shift would indicate a reduction in demand due to factors such as higher taxes or decreased government spending, which does not apply in this scenario.

Conclusion

The aggregate demand curve shifts to the right in response to expansionary fiscal policy due to increased government spending and lower taxes, which stimulate economic activity. All other options fail to accurately represent the effect of such policies, as they either suggest no change or a decrease in demand, which contradicts the basic economic principles involved.