Then and Now - Evolving Fed Response to the Financial Crisis
Students will first play the Fed Chairman game (online simulation) adjusting the Federal Funds Rate and targeting desirable unemployment rates using one of the traditional traditional tools of Fed policy to achieve the goals of growth with price stability and employment. After playing the game, students will read a presentation from the SanFrancisco Federal Reserve Bank CEO outlining new Fed policy with the consideration that manipulating the federal funds rate is no longer an option in the foreseeable future. How can the Fed effectively stimulate the economy without its most visible and effective policy lever? Play the following Fed Chair Game simulation, and read the recent presentation from the San Francisco Federal Reserve Bank CEO in order to gain insight into traditional policy, and newer policy responses given current economic conditions.
Context for Use
Description and Teaching Materials
First, students should play the "Fed Chair Game" Simulation link .
Play at least two full rounds of the game, and then answer the following questions:
1) Briefly describe how the game shows the use of monetary policy by the Fed.
2) Describe the realtionship between unemployment and inflation while playing the game.
3) What were your strategies in playing the game? How did you react to either unemployment or inflation increasing?
4) Describe the effects of unforeseen events on the economy during the game. How do these events impact the Fed's actions?
5) Given your experiences with the game, what do you believe to be the most important function of the Fed? What kinds of problems might the Fed encounter in carrying out these policies?
6) Did you get reappointed? Why or why not?
Economic growth has continued slowly since the Financial Crisis. The Fed has maintained a policy of keeping the Federal Funds rate low through this period, which limits the ability to further lower rates to stimulate the economy. What has been traditionally known as Open Market Operations has taken an increased prominence in terms of policy inititatives. Please read the following presentation from the CEO of the San Francisco Federal Reserve Bank, and then answer the following questions:
1) What are the limitations of further manipulations to the Federal Funds Rate? Describe what is meant by the phrase "zero lower bound".
2) What potentially disruptive effects might occur if interest rates were negative?
3) What are some of the similarities and differences between what has traditionally been described as Open Market operations, and the Quantitative Easing, or Large-Scale Asset Purchases (LSAP's)described in the presentation?
4) What is the intention of the LSAP's?
5) Do you believe that the more open, or transparent style of communication between the Fed and commercial markets will lead to increasing or decreasing stability in financial and investment markets? Why or why not?
6) What might be potential drawbacks to an ongoing policy of LSAP's?
Teaching Notes and Tips
Students may need to update or refresh their browsers before accessing the game. Play at least two full rounds of the game.
The playing field is still evolving – links to Fed information, Federal Reserve Bank individual Websites, and press releases are all available to encourage additional student interaction and engagement.