Question

In 2005, Hurricane Katrina destroyed oil and natural gas refining capacity in the Gulf of Mexico which subsequently drove up natural gas, gasoline, and heating oil prices. Three years later, once the refining capacity was restored, these prices came back down. The restoration of refining capacity should:
A) shift the short-run aggregate supply curve to the left.
B) shift the short-run aggregate supply curve to the right.
C) move the economy up along a stationary short-run aggregate supply curve.
D) move the economy down along a stationary short-run aggregate supply curve.

Answer 1

Answer:

In this case,the correct answer would be option B) in the answer choices or shift the short-run aggregate supply curve to the right.

Explanation:

• The destruction of the oil and natural gas refinery capacity Gulf of Mexico during Hurricane Katrina would reduce the overall supply of oil which would decrease the short run aggregate supply in the economy.
• This phenomenon can be illustrated by an initial shift of the aggregate supply curve to the left in the goods market in economy. Now, due to reduction in overall oil supply due to destruction of the refineries, the oil prices in the market would increase,everything else held constant.
• As after three years,the oil refineries are restored properly, the overall oil supply would again increase in the market from its initial position following the refinery destruction after the hurricane,which would consequently lead to a rightward shift of the aggregate supply curve in short run in the goods market.