Case Teaching Package
A case teaching package is available for this case. It includes strategies for case presentation, key concepts, solutions to the assignment questions in the case, and suggestions for the most effective ways to work this case into your course.

Length
This case is 8 pages in length and its case teaching package is 4 pages.

Abstract

This case reviews the policy options for dealing with oil price shocks, with a particular emphasis on monetary policy. The oil shocks and policies adopted in 1973 and 1979 are reviewed, and the student is put in the position of advising President Bush on what economic policy to use to respond to Iraq's invasion of Kuwait in 1990.

Linkages to Textbook Chapters or Journal Articles

Macro texts:

• Abel and Bernanke, Macroeconomics, 2nd ed., Chapter 12, "Keynesianism: The Macroeconomics of Wage and Price Rigidity"
• Auerbach and Kotlikoff, Macroeconomics, 1st ed., Chapter 10, "Understanding Recessions"
• Hall and Taylor, Macroeconomics, 3rd ed., Chapter 9, "Macroeconomics Policy: A First Look"
• Mankiw, Macroeconomics, 2nd ed., Chapter 10, "Aggregate Demand II"

References:

• James D. Hamilton, "Oil and the Macroeconomy Since WW II," Journal of Political Economy, April 1983
• Alan S. Blinder, "Economic Policy and the Great Stagflation", Academic Press, 1979.
• Knut A. Mork, "Business Cycles and the Oil Market," Energy Journal, 1994, special issue, pp.15-38.

Study Questions

1. What variables would one look at to decide if monetary policy is expansionary or contractionary?
2. Did the Fed do the right thing in 1973 and 1979?

Key Words

Macroeconomics, oil shocks, supply shocks, monetary policy, inflation, recession.

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