THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 581

PA R T V I I Monetary Theory Chapter 21 The Demand for Money Chapter 22 The ISLM Model Chapter 23 Monetary and Fiscal Policy in the ISLM Model Chapter 24 Aggregate Demand and Supply Analysis Chapter 25 Transmission Mechanisms of Monetary Policy: The Evidence Chapter 26 Money and Inflation Chapter 27 Rational Expectations: Implications for Policy CRISI S AN D RESP O NSE : T HE PE RFE CT STO RM OF ADV ERSE S HOC KS In 2007 and 2008, the Canadian economy was hit by a perfect storm of formidable shocks Higher demand for oil from rapidly growing developing countries like China and India and slowing of production in places like Mexico, Russia, and Nigeria drove up oil prices sharply from around the US$60 per barrel level at the beginning of 2007 By the end of the year, oil prices had risen to US$100 per barrel and reached a peak of over US$140 in July of 2008 The oil price shock was both contractionary and inflationary, and as a result led to both higher inflation and unemployment and many unhappy drivers at gas pumps If this supply shock were not bad enough, the subprime financial crisis in the United States hit the world economy starting in August of 2007 and caused a contraction in both household and business spending This shock led to a further rise in unemployment, with some weakening of inflationary pressure further down the road The result of this perfect storm of adverse shocks was a rise in unemployment from the 6% level in 2006 and 2007 to over 8% by the beginning of 2009 Inflation also accelerated from 2.6% in 2007 to over 5% by the middle of 2008, but with the increase in the unemployment rate and the decline of oil and other commodity prices by the beginning of 2009, inflation rapidly came back down again Although the Bank of Canada s aggressive monetary policy aimed to address the contractionary forces in the economy, the government of Canada also took action in a coordinated response to the global financial crisis with the Group of 20 (G20) countries Although this policy response helped stimulate household spending, it was overwhelmed by the continued worsening of the financial crisis, and the economy went into a tailspin 549