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Summary Report of Fed Response to Recession

This page authored by Erik Dean erik.dean1@pcc.edu, Portland Community College, based on previous activities developed for SERC as well as discussion at the Starting Point: Teaching and Learning Economics workshop held at the SF Federal Reserve, September 2013.
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This material is replicated on a number of sites as part of the SERC Pedagogic Service Project

Summary

This activity is designed to give students real-world context to their introduction to monetary policy, specifically in the context of a monetary policy response to an economic downturn. Additionally, it provides students an opportunity to collect, analyze, summarize, and report basic economic data. Beyond teaching students to understand economics in the news, it is hoped that this activity will give students the tools to engage in the discourse concerning these issues with the aid of relevant data.

Learning Goals

The student will:
  • understand and communicate the basic functions of monetary policy in the context of an economic downturn (recession)
  • gain hands-on experience in finding basic macroeconomic data

Context for Use

The activity is designed as an application of the basic concepts in monetary policy learned in an introductory macroeconomics course. It should follow lecture on those concepts and involve as little as 30 minutes or so in class over two class periods (this could be extended for student presentations, discussion, and the like if desired).

Description and Teaching Materials

In this activity students will learn about a particular epoch in US economic history and consider the role of monetary policy in that period. The activity has been designed with the 2008 'Great Recession' in mind but it should be suitable for any recession, past or future, that the instructor would like to cover. Likewise, the assignment could be tweaked to assign students different time periods, making note in the assignment of the relevant date range for data collection/presentation (Fed Funds Rate data on FRED in this case would be the constraint as it only goes back to 1954.)

Overview (see details below)

  • Lecture and reading on monetary policy

  • Day 1 of assignment

    • Lecture on lead-up to and initial stages of selected recession(s)

    • Assignment

  • Day 2

    • Class discussion/presentations of Fed response

    • Wrap-up discussion of assignment and monetary policy


Setup (Day 1): Following lecture and reading on the basic concepts and models of monetary policy, a scenario will be presented tracking an economic expansion and the initial stages of a recession. Data (fed funds rate, GDP, unemployment, inflation) will be pulled from FRED in class. This will provide a quick 'how to' for students to repeat outside of class. (A sample (Acrobat (PDF) 29kB Oct2 13) of these data covering the 'great recession' is provided for reference.)

Assignment (see assignment (Microsoft Word 2007 (.docx) 14kB Oct2 13) (Day 1): The class will discuss what the Fed should do, if anything, in response to the recession. After class, students will produce, alone or in groups, a graph using FRED showing the data that followed the event and write a brief explanation of the reasoning behind the Fed's action. Optionally, it may be required that, in addition to data pulled from FRED, students properly cite one source relevant and contemporary to the recession at issue.

Discussion/Presentation (Day 2): Students will discuss as a class, or if time present, the actual Fed response and the consequences that follow.

Wrap-up: Discuss results and collect write-ups for assessment. Discussion should emphasize the basic goals and tools of central bank policy, but could be extended to any number of issues including:
  • long-run economic, political, and social impact of monetary policy
    context of monetary policy, including fiscal policy
  • impact of the events at issue on the lives and communities of the students

Teaching Notes and Tips

Tips for Day 2 discussion:
  • This portion of the assignment can be approached in several different ways – as a class discussion, group discussions, or student presentations.

    • In particular, and if time permits, students could compare their results in small groups, either prior to class discussion of following student presentations.

  • The primary goal should be to reinforce and contextualize the basics of monetary policy, but secondary goals could be connecting or leading in to...

    • broader discussions of government policy with regard to recessions or the business cycle more generally; particularly the potential limitations of monetary policy and the need for fiscal policy in conjunction with interest rate policies;

    • consideration of central bank policy in other recessions or other nations (see follow-up assessment below).

  • The instructor may also want to encourage discussion of the problems students encountered in creating the report and the solutions they devised to address these problems.


The timelines provided under 'References and Resources' may also be of value to students, the instructor, or both.

Assessment

Grade completed summary report for data collection, correct explanation of the policy, and the reason for its use.

Follow-up assessment to check for understanding of monetary policy generally and the assignment specifically could be given in an exam or in a separate set of questions, to be completed individually or in groups.

For example, the circumstances, including data, of a different recession in the U.S. or in another country could be given, along with the central bank's response. Students could then be asked to explain the rationale behind this response. The Great Depression in the U.S. or the recession of the early 1990s in Japan might make for good examples here, potentially leading into discussions of liquidity traps and the need for fiscal stimulus beyond monetary stimulus.

References and Resources