🎛️ Simulation · Intermediate
Oil Price Shock
War in an oil-producing region cuts global supply. Oil and energy prices jump 120%.
The facts
- The economy starts in a normal, balanced state.
- Energy prices rise 120%.
- The Fed does not respond (rates stay at 2.5%).
Your predictions
Playing it out…
Why?
An energy shock is a negative supply shock: it shifts short-run aggregate supply to the left. Prices rise while output falls — the painful combination called stagflation. Workers’ paychecks buy less, so real wages drop. The 1973 and 1979 oil shocks are the classic historical examples.