Question 7

The short-run aggregate supply (SRAS) curve will shift to the right.

The decrease in oil prices due to fracking leads to lower production costs for businesses, which incentivizes them to increase output. As a result, the SRAS curve shifts to the right, indicating an increase in the quantity of goods and services supplied at any given price level.

A) Shifts to the left

This option is incorrect because a leftward shift in the SRAS curve indicates a decrease in the overall supply, typically caused by rising production costs or negative supply shocks. The decrease in oil prices due to fracking does not create such conditions; instead, it lowers costs for producers.

B) Remains the same

This option is incorrect as it suggests that the SRAS curve is unaffected by changes in production costs. However, a significant decrease in oil prices would indeed affect production costs, leading to an increase in supply and a rightward shift of the SRAS curve.

C) Becomes vertical

This option is incorrect because a vertical SRAS curve represents a situation where output is at full employment and is not responsive to changes in price levels. The decrease in oil prices would not create such a scenario; instead, it allows for an increase in output in the short run.

D) Shifts to the right

This option is correct because a decrease in oil prices reduces production costs for firms, encouraging them to supply more goods and services. Thus, the SRAS curve shifts to the right, reflecting the increase in aggregate supply.

Conclusion

The correct answer is D because the decrease in oil prices leads to lower production costs, prompting an increase in supply in the short run. This is in direct contrast to the other options, which either suggest a decrease in supply or no change at all, neither of which align with the economic impact of reduced oil prices on production costs.