Practice question · Multiple choice
The standard Keynesian response to a downturn is to stimulate demand. Why did that fail after the 1973 oil shock?
Hints
- Ask which curve the oil price moved.
- What does pushing demand into a constrained supply do to prices?
Show the answer
D. Because the shock hit supply, not demand
Why
Demand management answers demand shocks. A supply shock raises prices and lowers output together, and more demand worsens the first without fixing the second, which is why Volcker eventually attacked the inflation instead.
Practise Oil Shocks and Stagflation
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More questions on Oil Shocks and Stagflation
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