Question

​Almora, a developing open​ economy, is experiencing an economic boom since it discovered oil reserves off its coast two years ago. Bill​ Hudson, an economist with the Finance Ministry of​ Almora, said in an interview that the oil boom has improved the average standard of living in the economy. Robin Peters is an industry analyst who does not agree with​ Hudson's view. In one of his recent articles in the​ country's leading business​ daily, Robin claimed that the high rate of inflation following the boom has actually weakened the expansionary impact on the economy. Which of the following statements is Bill and Robin likely to agree​ with?
A. The cost of industrial production will decline over the next couple of years.
B. The purchasing power of the people has increased substantially after the discovery of oil reserves.
C. The​ government's expenses on unemployment benefits will increase.
D. The discovery of oil reserves has resulted in a rightward shift of the​ long-run aggregate supply curve.
E. The​ country's production possibilities frontier will not be affected by this discovery.

Answer 1

Answer:

D) The discovery of oil reserves has resulted in a rightward shift of the​ long-run aggregate supply curve.

Explanation:

Since the discovery of oil, Almora's gross domestic product will start to grow (both nominal and real GDP). Since the aggregate supply exceeds the real GDP, it is reasonable to expect that the GDP will continue its expansion for several years. The only factor that can diminish economic expectations is that inflation increases so much that it will end up hurting the economy.

Having huge oil reserves doesn't mean that the standard of living has improved. Just look at Qatar, United Arab Emirates, Saudi Arabia, etc. The populations of these countries is either extremely rich or very poor. Or we can look at Venezuela and realize that everyone that doesn't work for the government is poor.

This scenario usually repeats in countries that rely only on natural resources.