Fiscal policy can shift 1 aggregate demand only 2 both aggre

Fiscal policy can shift:

1) aggregate demand only

2) both aggregate demand and potential ouput

3) both aggregate demand and short-run aggregate supply, but not long-run aggreagte supply

4) only short-run functions

Solution

Fiscal policy can change aggregate demand (by change in government spending and tax). Also, fiscal policy can shift short-run aggregate supply (example: Lower tax rate will increase firms\' net profit, who will be encouraged to produce more out, increasing short run aggregate supply).

But long run aggregate supply depends on stock of resources and technology, which is not influenced by fiscal policy.

Correct option (3)