Predicting Historical Inflation Using AS-AD

This activity can be done with any class size. I use a document camera to show the class all team note cards at the same time. There would be other ways of reporting, such as collecting team note cards at the end of class and photographing them into a PowerPoint or handout for the next class day. The activity takes about 20 - 30 minutes. It works well right after the class has covered the AS-AD model. Each student's notes should record the appropriate AS-AD analysis for each time period below. The time period for the graph should be 1900 to the present.

Overview

Students are given a worksheet with AS-AD curves and relevant information about different periods in the history of the U.S. Each team is given a notecard with a time line graph with time on the x-axis and inflation on the y-axis. However, the graph is blank. Students fill out the AS-AD curves and then make predictions about inflation. The team comes together to create their own predicted historical graph of inflation (no looking at actual data on their phones). Finally, I collect all team note cards with their predicted historical graphs. I use the document camera to show all team graphs and compare them to the actual historical graph. I ask teams to explain how they decided when the graph should rise and fall.

Expected Student Learning Outcomes

In this exercise, students will be able to predict inflation in different historical periods using the AS-AD model.

Information Given to Students

<a href="https://serc.carleton.edu/details/files/195195.html">Student handout for AS-AD and inflation graphs</a>

Prefatory Remarks:

This particular application does not require many prefatory remarks.

Facilitation of application:

As long as student have sufficient background in AS-AD curves, the faculty member can generally leave student teams to their own devices during the actual team portion of the exercise.

Follow up questions:

Once the faculty member displays each team's prediction of the historical inflation graph, he or she can ask questions like, "I see that team X predicted a sudden drop in inflation around YEAR. What factors lead to this prediction?" Also, "Team Y was the only team to predict an increase in inflation during Z period. That matches the real data that you will see shortly. Explain to the class how you anticipated that"

Concluding remarks:

The professor should emphasize the key points in the historical graphs: (a) stagflation during the 1970's due to high oil prices, (b) a sudden drop in inflation due to Volker's monetary policy, (c) low inflation during the technology boom of the 1990's, (d) low inflation during the great depression due to an inward shift in AD and (e) high inflation during wars due to government spending.

If the teams have come up with some of the big changes on the historical graph of inflation (inflation rises during war times and when oil prices are high / inflation falls during Volker's time and during the dot com boom and during the Great Recession), then I know the students understand it. I fill in the gaps in their understanding through the class discussion about the exercise afterward. If time permits, it is also possible to use a gallery walk for this application, where teams submit both their time graph and also their logic for each dip or peak in the graph, and evaluate one another's graphs in the classic style of a gallery walk.