How will the aggregate demand curve respond when the government conducts a contractionary fiscal policy?

A leftward shift of the aggregate demand curve would indicate a decrease in overall demand, typically resulting from contractionary fiscal policies, such as reduced government spending or increased taxes. Expansionary fiscal policy, however, is characterized by increased demand, making this choice incorrect.

A vertical aggregate demand curve would suggest that total demand remains unchanged regardless of the price level, which is not the case during expansionary fiscal policy. The aggregate demand curve is typically downward sloping, and expansionary measures increase demand, thus shifting the curve right rather than altering its slope to vertical.

The correct response is that the aggregate demand curve shifts to the right due to the increase in total spending resulting from government intervention through expansionary fiscal measures. This shift indicates that at every price level, a greater quantity of goods and services is demanded.