Understanding Monetary Policy: in-class and out of class group activity.

This page authored by Ribhi Daoud, Department of Economics, Sinclair Community College.
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This material is replicated on a number of sites as part of the SERC Pedagogic Service Project


Class is divided into 3 groups; group 1 represent the Fed; group 2 represents financial institutions; group 3 represents the borrowers (spending and investing). Groups are provided with state of the economy (real or hypothetical). Group 1 conducts research then designs and implements appropriate monetary policy. The other two groups research and predict their reactions to Fed policy. All three groups are researching and gathering information on policies, expectations, and reactions of the other groups. Not only group members interact, but also groups interact to assess their activities, findings, and learning. Written reports can be done by each group; or perhaps a written report can be done by each student.

At the completion of this activity, students should be able to understand how monetary policy works and the potential impact of monetary policy on the economy.

Learning Goals

Students will be able to understand how the fed, financial institutions and the public act and interact, and how monetary policy works through influencing money supply, credit access, and interest rates to impact aggregate demand and the economy. Students will learn and understand concepts such as Reserve Requirement, Actual Reserves, Required Reserves, Excess Reserves, Money Multiplier, Federal Funds Rate, Discount rate, Prime Rate, Open Market Operations, Term Auction Facility, Cyclical Asymmetry and the Liquidity Trap.

Context for Use

Group activities and class participation promote active learning. Research reveals that students learn better when they are engaged. This activity is appropriate for college and university students learning monetary policy. This activity likely to be more effective if class size does not exceed 24 students since the class is divided into 3 groups, and group size should remain within the range of 7 or 8 students. Time required for groups to complete their work varies, but it should be feasible to be done in one week.

Description and Teaching Materials

Group 1 researches the structure, functions, and policies of the Fed. The group prepares a short written report of their findings that encompass what the group proposes the appropriate policy the Fed should undertake to help stabilize and restore a healthy economic condition. The report specifies the monetary tools to be used by the Fed and the likely outcomes. Also, this group speculates on the reactions of the other two groups.

Here are some of the relevant questions this group will address:
1. What is the current or projected state of the economy?
2. What is the appropriate monetary policy for current or projected economic conditions?
3. What monetary tools should be used and how should they be used?
4. What outcomes are expected from implementing such policy?

Group 2 conducts research and writes a short report on the structure, functions, and roles of financial institutions in the economy. The report specifies how financial institutions would react to the policy enacted by group 1(The Fed). As such, this group outlines the connection between financial institutions and the Fed within the framework of monetary policy.

Here are some of the relevant questions this group will address:
1. What is the current or projected state of the economy?
2. What policies the Fed is or will undertake to address issues facing the economy?
3. How should or must financial institutions react to Fed's policies?
4. How Fed's policies will impact financial institutions lending and credit policies?
5. In what ways financial institutions strategies may conflict with Fed's strategies and policies?

Group 3 investigates and writes a short report on how the public may react to the Fed policy, as well as reactions to the incentives provided by financial institutions. This group will explore the factors that impact public borrowing, spending, saving, and investing in capital projects.

Here are some of the relevant questions this group will address:
1. How to understand the current and projected state of the economy?
2. What are socioeconomic factors impacting decisions pertaining to borrowing, spending, investing, and saving?
3. In what ways consumption, saving, and capital investments may conflict with monetary policy?

While members within each group interact, there will be an opportunity(s) for the 3 groups to interact and discuss their work.

Teaching Notes and Tips

- Instructor may assign groups the task of researching the state of the economy in the real world, or may simply propose a hypothetical economy having a recession or perhaps encountering demand-pull inflation.
- Instructor should decide what sources and references groups may use.
- Instructor should provide groups with guidelines pertaining to timelines and deadlines to complete the activity.
- Instructor provides groups guidelines for in-class as well as out of class group interactions.
- Instructor designs the assessment or the criteria by which students will be graded and receive credit for the activity.
- Before groups begin their work, the instructor should see to it that all students understand all components and steps that groups will perform to complete the activity.


- Instructor may ask groups or individual students to write and submit a report of their activities and findings.
- Instructor observations of students' in-class group discussion and interaction.
- Instructor may quiz members of each group based on the specific group report.

References and Resources

At the discretion of the instructor, students may be assigned specific links, or perhaps students can be referred and encouraged to consult the reference librarian within their institutions. As groups, students should be encouraged to interview bankers, economists, and politicians, whenever it is feasible. Students can and should research district Federal Reserve banks web sites.