Can your students stabilize the economy using the federal funds rate?
This activity uses an interactive online simulation of the effects of federal funds rate changes on the rates of unemployment and inflation (provided by the Federal Reserve Bank of San Francisco). Students will take on the role of monetary policy decision making as if each were the Fed Chairman. They will be given various headline news events reflecting shocks to the economy to which they will respond with monetary policy actions by making decisions about the direction and magnitude of change in the federal funds rate. The impact of their actions will be reflected in changes in the unemployment rate and the inflation rate. Can your students stabilize the economy and get reappointed as the Fed Chairman after 16 quarters?
Concepts: monetary policy, inflation, unemployment, Phillips Curve
Context for Use
Class size: Any. Individual or paired collaborative activity with device with internet access.
Institution: high school AP economics, college or university
Uses: inside or outside of classroom
Time: Minimum 20 minutes to one hour depending upon student preparedness and follow up activities and assessment
Adaptation: easily adapted to online learning; individual or paired activity; inside or outside of the classroom
Pre-skills: knowledge of money, money supply, how monetary policy affects the real variables in the economy.
Location in the course: unit on monetary policy.
1. Used as a formative assessment tool for learning the effectiveness of monetary policy.
2. Used as a formative assessment to evaluate the conflicting nature of the Federal Reserves' mandated goals of full-employment and price stability.
3. Used as a formative assessment to demonstrate an example of a monetary policy complication such as the lag effect.
Description and Teaching Materials
Teaching Notes and Tips
1. Use the Fed website 'policy in depth videos' to have students evaluate a real world application of monetary policy. http://sffed-education.org/chairman/
2. Use the Fed website with OMO data to evaluate the federal funds activity of the Fed from a given time period selected by the instructor. Students would evaluate and compare the game to the real world by viewing the real world direction and magnitude of the rate changes. They will then research the change in the unemployment rate and inflation rate during and after the time period of the rate changes.
Variations: make it a competition. Put students into pairs as teams. Run one game. Teams remaining as Fed Chair compete in round two. Continue until one team remains as 'chairman'. Teams losing their Fed Chair roles still continue to play additional rounds to learn from the game. Last 'Chair' standing receives a reward (e.g., bonus points).
A discussion with the class of the current effectiveness of this monetary tool may be needed. If the federal funds rate is currently at or near zero, discuss why this is and what other tools are being used. Then discuss more about the use of federal funds rate tool when it is effective during more 'normal' economic periods.
1. What is the dual mandate (goals) of the FED?
2. How do changes in the federal funds rate affect the unemployment rate?
3. How do changes in the federal funds rate affect the inflation rate?
4. Explain the relationship between the inflation rate and the unemployment rate?
5. Explain how this activity illustrates the lag effect of monetary policy?
Discussion Questions for face to face or online courses:
Take a position on the following: Should the Fed have a dual mandate of full-employment/maximum sustainable long-run growth and price stability or just one mandate? Explain and support it with two referenced sources in addition to the textbook. Online students should provide a reply post to two other students with one being a rebuttal to a student taking a position different from your own.
Give the students a stagflation scenario. (insert here current data on inflation and unemployment) Ask them to write a Federal Reserve FOMC press release statement as to the (federal funds rate) monetary policy actions to be taken by the FOMC given the stagflation. In their posting, students should recognize the policy dilemma and explain their choice of action and goal of their action (reduce unemployment or reduce inflation) with a cost/benefit analysis of the effects of their proposed actions on the levels and rates of inflation and unemployment. Online students should provide a reply post to two other students with one being to student taking a different policy action.
References and Resources
The online interactive simulation. The site includes a glossary of terms and a brief explanation of monetary policy tools.
The source of historical data on federal funds rates
Excellent source of economic data to download, and graph. Faculty may use to provide data for students or students may use to for in their discussion, assignments and assessments.