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Exploring Monetary Policy Decisions: A College Classroom Exercise

Leticia Starkov, Elgin Community College
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This material is replicated on a number of sites as part of the SERC Pedagogic Service Project

Summary

Students working in small groups analyze press releases of the Federal Open Market Committee. In these press releases, students explore decisions made by the FOMC with the purpose of combating either recession or inflation by using the federal funds rate as a target and the traditional monetary policy tools. Students also identify the extraordinary crisis measures implemented to help the country recover from the great recession.

Learning Goals

At the end of the class period students should:
Identify the goals of the FOMC when using different targets for the federal funds rate by reading FOMC press releases.
Identify the extraordinary crisis measures of monetary policy by reading FOMC press releases.
Explain the rationale followed by the FOMC when implementing monetary policy decisions.

Context for Use

This exercise can be used in a college class of principles of macroeconomics. It requires 75 minutes. The appropriate class size is between 20 and 30 students. This exercise is recommended to be used close to the end of the semester. It can easily be changed to fit class periods with different durations. It could also be modified for a one-semester intro to economics class.

Description and Teaching Materials

In this exercise students are organized in small groups to read press releases of the Federal Open Market Committee meetings for three different dates. The meetings must correspond to contrasting decisions made by the FOMC as a result of different economic situations. Students answer questions regarding the press releases and share their answers with the rest of the class.

The exercise requires copies of press releases of the Federal Open Market Committee meetings for three different dates. The suggested dates are April 18, 2001, June 29, 2006, and June 24, 2009. It also requires the questions that students will answer. Access to macroeconomic statistics such as economic growth, inflation, unemployment, consumption, and investment, for the period of time 2000-2013, is required too. The data must include a graph of the federal funds rate for the same period of time.

Macroeconomic data can be found here


Teaching Notes and Tips

The chosen dates for the FOMC meetings are April 18, 2001 (Press Release 1), June 29, 2006 (Press Release 2), and June 24, 2009 (Press Release 3). In 2001 and 2009 the FOMC decided to decrease the federal funds rate, which corresponds to an expansionary monetary policy. In 2006, the FOMC increased the federal funds rate, implementing a contractionary monetary policy. Of course different dates can be used, as long as there is a contrast of policies. For instance, Press Release 1 can be January 3, 2001, Press release 2 May 10, 2006, and Press Release 3 December 16, 2009.
Divide the class in 10 groups of 2 or 3 students each. Half of the groups received Press Release 1. The other half of the groups received Press Release 2. Each group receives the same five questions. Students read the Press Release and answer the questions. After answering the questions, each group will be required to answer one of the questions in front of everybody else. All the groups will be required to provide at least one answer. The order of answering the questions will be randomly determined by assigning numbers to each group and writing the numbers in a piece of paper. After the first group, every group will also be required to ask a follow up question to the previous group to clarify or expand the answer. After the last group answers, the first group will have its chance to ask its follow-up question to the last group. The answers will be written on the board in a table that contrasts the two cases.
Next, time will be allocated to review the answers and relate them to the previously acquired knowledge of the US economic situation in the correspondent time periods. All the students will be encouraged to participate in this activity. Graphs of macroeconomic variables (economic growth, inflation, unemployment) can be used to illustrate this part of the exercise.
All the groups receive a copy of Press Release 3. Half of the groups are required to identify the extraordinary crisis measures decided in that meeting. The other half of the groups are required to define the potential impacts of these measures, positive and negative, in the economy. After this group activity, the extraordinary crisis measures and the economic impacts are written on the board. Students have time to ask follow-up questions.
Timing:
5 minutes: Present the goals of the activity and explain the logistics. Organize the groups.
15 minutes (working in small groups): Read the press release with the traditional tools of monetary policy. Half of the groups read Press Release 1, the other half read Press Release 2. All the groups answer questions.
20 minutes: Answer the questions. Write answers on a comparison table on the board and relate to the economic situation in correspondent periods.
15 minutes (working in small groups): All groups read press release 3. Half of the groups work in identifying the extraordinary crisis measures. The other half of the groups discusses the potential economic impact.
15 minutes: Writing on the board the answers of the different groups and identifying the best answers.
5 minutes: Summarize and relate to the learning outcomes.

Assessment

Student achievement of the learning goals of this activity can be assessed in two different ways. First of all, assessing the quality of students' answers and participation during the exercise. It must be clear that student's performance during the activity will be graded. The written responses must be collected and graded. The second option is to assign students to answer the same questions that were answered during the classroom exercise for homework. This time, students are required to utilize the latest FOMC press release and answer the questions individually. By assigning this homework individually it can be confirmed if every student was actively participating in the group during the classroom exercise.

References and Resources

http://www.federalreserve.gov/monetarypolicy/fomccalendars.htm
http://www.federalreserve.gov/monetarypolicy/fomc_historical.htm
The FOMC Press Releases or Statements can be found in the previous URLs. First URL has the Press Releases for 2008 to date. The second has Press Releases before 2008.