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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


​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