The Recession of 1990-91 The story of the 1990-91recession begins in mid-1990, when Iraq invaded Kuwait, a major oil producer. During this conflict, Kuwait’s oil was taken off the world market, and so was Iraq’s. The reduction in oil supplies resulted in a rapid and substantial increase in the price of oil, a key input for many industries. From the second to the fourth quarter of 1990, oil prices rose from $14 to $27 per barrel. a. Make an assumption that in year 1990, the U.S economy was initially in long-run equilibrium b. Use simple AD –AS graph, illustrate and explain verbally how the U.S. economy moved in recession of 1990-91. c. Indicate potential output(Y*) actual output (Y), price level (PL). What type of unemployment was present? d. What was so specific about the recession of 1990-91? Explain e. If the economy is self-correcting (no action form government), what forces would bring the economy back to the full employment level of Real GDP? Explain verbally and illustrate graphically f. If monetary policy is used to eliminate the economy problem in 1990-91, explain what type of monetary policy will be an appropriate to cure the economy. g. Is there any dilemma the Fed might face in the case of 1990-1991 recession while choosing the appropriate monetary policy?