The Oil Price Shock of 2008

In 2008, oil prices swung wildly. In the first half of the year, oil prices (measured by the price of a gallon of West Texas Intermediate Grade Crude Oil) rose from $96 on January 1 (and had been as low as $51 in January 2007) to a peak of $145 in July. A supply shock of this magnitude would normally have an adverse effect on output, employment, and investment, of course. But when combined with the housing crisis and financial crisis that developed in 2008, the declines in output, employment, and investment were extremely steep as the economy entered the greatest recession since the Great Depression of the 1930s.

Our theory predicts that an adverse supply shock like the oil price shock of 2008 will cause real interest rates to rise. However, to combat the housing crisis and later the financial crisis that year, the Federal Reserve reduced nominal interest

rates dramatically, especially when the financial crisis worsened in September 2008. As a result, real interest rates also declined, and in many cases became negative.

As the financial crisis spread across the globe, worldwide demand for oil fell sharply and the price of oil declined from $145 in July to $30 in mid-December. Thus the adverse supply shock became a beneficial supply shock. But of course, the damage to the economy from the housing crisis and financial crisis dominated the beneficial effects of lower oil prices.

1.) The key factor influencing the effect of an oil price shock on the real interest rate is

Specifically,

2.) The application references oil price shocks that took place in the United States during the

Of the oil price shocks mentioned, the real interest rate rose significantly

3.) Working with the data given in the application, the model suggests that

If indeed this was their expectation, time has shown that they were In the economy, the following statistics describe the money supply:

CU = $1000 billion

RES = $100 billion

DEP = $1,500 billion

Given these data, calculate the amount of the monetary base:

Given these data, calculate the amount of the monetary base:

1. BASE = ____ billion

Calculate the quantity of the money supply:

2. M = ____billion

Calculate the ratio of reserves to deposits:

3. res = ____ (carry out to four decimals)

Calculate the ratio of currency to deposits:

4. cu = ____ (carry out to four decimals)

Calculate the money multiplier:

5. mm = _____ (carry out to four decimals)

Now, suppose a shock causes banks to change the amount of reserves they hold relative to deposits, so that res changes from 0.0667 to 0.0556. Suppose that when this happens, both cu and BASE do not change. However, the change in res will affect mm, M, CU, RES, and DEP.

Calculate the new value of the money multiplier:

6. mm = ____(carry out to four decimals)

Now, calculate the new value of the money supply:

7. M = _____ billion

8. DEP= ____ billion

9. CU=____ billion

10. RES=____ billion The money supply is $1,100,000 currency held by the public is $100,000, and the reserve-deposit ratio is 0.100.

Using the above information, determine

1. Deposits $___

2. Bank Reserves$_____

3. Monetary base $____

4. Money Multiplier ____

In a different economy, vault cash is $1,000,000,

deposits by depository institutions at the central bank are $5,000,000,

the monetary base is $12,000,000,

and bank deposits are $24,000,000.

5. Bank reserves $_____

6. Currency held by the public $___

7. Money supply $___

8. Money multiplier ____