Monetary Policy: Evaluating the Fed's Effectiveness Leading Up to and After the Crisis of 2008
Context for Use
This activity is a team-based policy debate. The learning goal is for students to apply economic models and analysis to support their arguments on relevant issues. This application focuses on monetary policy in two questions; the first asks what (if anything) the Fed should do differently given that most economists were surprised by the intensity and fallout from the crisis of 2008. The second looks at the period from 2008-2015 and asks if the Fed was not aggressive enough given the low inflation and high unemployment during that time. Students will need both theoretical understanding of monetary policy in the macroeconomy and knowledge of recent macroeconomic events to answer these questions well. Each application exercise has policy questions with five specific options. The topics are chosen and options are designed so that there is not a single intended correct answer. Rather, students should be able to make an argument for any of the choices. Their task as a team is to discuss the issue and come to some consensus for the team choice. They are instructed to vote if they cannot come to consensus. The team discussion takes the first 15-20 minutes of the activity.
The instructor then facilitates a class discussion, which begins by having teams simultaneously reveal their choices (using large cards with letters). The teams are then called on in turn to defend their choices to the rest of the class. Each team should present a cogent argument for their choice, couched in macro models as well as relevant data and recent history. The presentations begin a class wide discussion on what the best answer is. The instructor facilitates this discussion for 10-15 minutes, after which it culminates in class vote. Students vote individually for the class vote, but extra credit can be offered for any team whose choice wins a majority of the class vote (thus incentivizing effective argument and persuasion).
Expected Student Learning Outcomes
In this activity students will use both macroeconomic models and data on recent macroeconomic performance to support policy arguments for or against adjusting the Fed's monetary policy tools.
Information Given to Students
Student teams are given folders with both a team quiz and application exercises inside.
Quiz - AD-AS and monetary policy (Microsoft Word 2007 (.docx) 15kB May14 18)
Application Exercises - Monetary Policy (Microsoft Word 2007 (.docx) 14kB May14 18)
Teaching Notes and Tips
In the application exercise students are given two policy questions in teams. Their task as a team is to try to form a consensus around one of the five options for each policy. The policy questions are designed so that there is no "right" answer; the goal is for students to see how economics can inform policy debates. In this case, the students are evaluating the effectiveness of monetary policy both leading up to the crisis of 2008 and in the aftermath of the crisis. Students are challenged to consider what might be improved (if anything) about the U.S. monetary policy structure and application. The goal is for students to engage in debates informed by economic models; as the students deliberate the instructor should circulate, listen to arguments and ask probing questions to get students to think critically. Monetary policy can seem obtuse, but it has major impacts on peoples' lives. The instructor should remind students of its power and encourage them to think in terms of the models and ask hard questions: Could the Fed have prevented the crisis of 2008? Why or why not? Was monetary policy after the crisis effective? Should the Fed have been even more aggressive given that fiscal stimulus was strongly reduced just a few years after the crisis?
Once all teams have made their choices they should all report them simultaneously. This can be easily done by giving each team large letters (A through E) and having them all hold up the letter of their choice at the same time. The instructor should select one member from each team to briefly defend that team's choice to the class (random selection is good here; it is better if students do not know who is presenting until it is time to present so everyone has to prepare and be engaged in the discussion). The instructor then leads a short class discussion on the topic, filling in or correcting flawed reasoning when necessary and also noting if there is a convergence to one or two options. Here the students should be challenged to think big and question how effectively we can stabilize the macroeconomy given both economic and political constraints. It is good then to consider why some options were deemed valid while others were eliminated. The discussion culminates in a class-wide individual vote on each policy. Students do not have to choose the same policy from their group for the individual vote; the point of the class-wide individual vote is to see if a particular argument "won the day" by securing a majority of votes. If that is the case, the instructor can note that occurrence and discuss whether the policy might be successful in practice. If there is no consensus policy, the instructor can note and/or discuss the challenge of succeeding in democratically passing sound policies. If desired, additional incentives can be offered to any team whose policy choice secures a majority of class votes; a few extra credit points can motivate teams to build consensus and argue strongly for their preferred policy.