Classroom Activity: Interest Rates and the Federal Reserve part of Starting Point: Teaching and Learning Economics:Starting Point: Economics in Two-Year Colleges:Activities
In this classroom activity students work in groups (pairs) that include a borrower (consumer or firm) and a lender (bank). There are three rounds of activity that the pairs engage in. In Round 1, students work with nominal and real interest rates to think more deeply about how inflation can transfer purchasing power from borrowers to lenders, or vice-versa. In Round 2, students consider the impact of changes in the Federal Funds rate on borrowing/lending and overall economic activity. In Round 3, students are asked to think critically about inflation expectations, the impact of prediction errors, and the roll of forward guidance by the Federal Reserve Bank in forming expectations.