Refer to the above figure. Assume that B is the current long-run aggregate supply (LRAS) curve and E is the current short-run aggregate supply (SRAS) curve. If a 90-day embargo of oil from the Middle East to the United States were announced, and if after that 90-day period oil prices were expected to return to normal pre-embargo prices, then you would expect
A) the LRAS and the SRAS to remain at B and E, respectively.
B) the LRAS to remain at B, but the SRAS to shift to D.
C) the LRAS to remain at B, but the SRAS to shift to F.
D) the LRAS to shift to C, and the SRAS to shift to F.

Question

Quizplus · Accepted Answer

A 90-day embargo of oil from the Middle East to the United States would cause a decrease in the short-run aggregate supply (SRAS) due to the increase in input costs for businesses that rely on oil. This would shift the SRAS curve from E to D. The long-run aggregate supply (LRAS), however, would remain constant at B as it represents the productive capacity of the economy in the long run. Therefore, the best choice would be B, as the LRAS remains constant at B, while the SRAS shifts from E to D.

Refer to the Above Figure