Question 60

The aggregate demand curve will shift to the right.

An expansionary fiscal policy involves increasing government spending or cutting taxes, which boosts overall demand in the economy. This increase in demand causes the aggregate demand curve to shift to the right.

A) Shifts to the left

This option is incorrect because a leftward shift in the aggregate demand curve would indicate a decrease in overall demand. Expansionary fiscal policy is designed to increase demand, not decrease it.

B) Becomes vertical

This option is incorrect as well. A vertical aggregate demand curve would suggest that demand is perfectly inelastic, meaning changes in price do not affect demand. This does not apply in the context of expansionary fiscal policy, which aims to increase demand.

C) Remains the same

This option is incorrect because expansionary fiscal policy actively seeks to change the level of aggregate demand. If the aggregate demand curve remained the same, it would indicate that fiscal policy is ineffective, which is not the case during expansionary measures.

D) Shifts to the right

This option is correct as it accurately describes the effect of expansionary fiscal policy. Increased government spending or tax cuts lead to higher consumption and investment, resulting in a rightward shift of the aggregate demand curve.

Conclusion

The correct answer, which indicates that the aggregate demand curve shifts to the right, reflects the intended outcome of expansionary fiscal policy. All other options fail to recognize the fundamental principle that such policies are designed to stimulate economic activity by increasing overall demand. Thus, option D is definitively the right choice.