Which of the following statements least likely represents a scenario from an exogenous shock?
A) Political unrest in the Middle East leading to an unexpected decrease in oil production, increased oil prices, decreased consumer spending, increased unemployment, and a slowed economy. B) A country defaults on its debt payments, thereby causing the country’s currency to lose value and forcing the central bank to take measures to stabilize the banking system and the economy. C) OPEC not being able to agree on production levels leading to increased uncertainty in global markets and increased oil prices.
Your answer: B was incorrect. The correct answer was C) OPEC not being able to agree on production levels leading to increased uncertainty in global markets and increased oil prices.
Exogenous shocks usually lead to economic slowdowns, as in the case of an oil shock leading to higher prices, inflation, reduced consumer spending, increased unemployment, and a slowing economy. A reduction in oil prices could be caused by a weak global economy with weak demand for oil or an oversupply of oil in the global market. This would reduce the price of oil and boost the economy, potentially overheating it in which causes high inflation and increased interest rates that ultimately slow the economy down. In a financial crisis the result is usually characterized by banks becoming vulnerable and requiring action by the central bank to stabilize the banking system and economy by increasing liquidity and lowering interest rates.