A worldwide spike in oil prices, resulting in higher production costs.
A worldwide spike in oil prices will raise cost of production, shifting the aggregate supply curve to the left. As a result, output will decline, and prices will rise - A phenomenon known as stagflation, as it combined stagnation and inflation. In this situation, the monetary authorities have no good options. An expansionary monetary policy will address the shortfall in output but worsenininflation. A contractionary monetary policy will lower inflation but further reduce output.
