To have long term effects on the economy, monetary and fiscal policies must _____.

a. alter short-run aggregate supply

b. alter short-run aggregate demand

c. affect the level of potential output

d. smooth fluctuations in economic activity over the business cycles

e. none of the above

The correct answer is b. alter short-run aggregate demand.

This is the correct answer because the equilibrium level of monetary and the fiscal policy is achieved by a balance between the price level and the economic output level. The tools used by monetary policy are interest rate and the quantity supply of money. The tools of the fiscal policy are the general price level and the economic output level. Any variations in these factors have a major impact on the aggregate demand in the economy. The changes in the short-run economic variables help in achieving the long-run equilibrium level in the economy.