Fiscal Policy Principles and Practice

This activity was designed for principles courses after covering the basics of fiscal policy and international finance (mostly trade deficits). It will take 50-75 minutes. The activity starts with a readiness-assessment quiz on the background material, which is followed by two policy application exercises.

Overview

The activity is a team-based policy debate. The learning goal is for students to use economic models and analysis to evaluate fiscal policy and determine a broad direction for U.S. policy. They are asked first to consider the persistent U.S. budget and trade deficits since the early 2000s and agree upon a solution. They are then asked to commit to a broad governing principle for U.S. fiscal policy such as a balanced budget, borrowing to increase aggregate supply or maintaining the status quo. The application exercise has policy questions with five specific options. The topics are chosen and options are designed so that there is not an intended correct answer. Rather, students should be able to make an argument for any choice based on economic models and concepts. 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 agree. 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. When presenting, they should use the models and concepts covered in class to support their argument. This begins a class wide discussion on what the best policy should be. 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 choose and defend policies to address U.S. budget and trade deficits and identify priorities for fiscal policy. They are expected to do so using models and concepts covered in class.

Information Given to Students

Student teams are given folders including both the quiz and application exercises.

Quiz - Fiscal policy (Microsoft Word 2007 (.docx) 19kB May14 18)
Application Exercises - Fiscal Policy (Microsoft Word 2007 (.docx) 13kB May14 18)

This activity includes both a readiness-assessment quiz and application exercises. It can be completed in one class period or spread over two. The quiz is ten multiple choice questions on the basics of fiscal policy in an AD/AS framework (principles level) as well as some material on international finance that mostly focuses on financial flows and trade deficits. This material has been previously covered in both readings and class lectures or activities. The quiz is posted online for individual completion before class and then given to each team to take again in class along with immediate feedback scratch cards.
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. For fiscal policy, students are first asked to find a solution to persistent U.S. budget and trade deficits. They should be able to discuss those in context and defend their choice in terms of the AD/AS model and basic economic principles. For instance, if they propose balancing the budget they should address the contractionary impact it will have on aggregate demand in the model. When identifying principles (the second question), students should be challenged to not be overly simplistic. If they propose a balanced budget amendment, for instance, will there be exceptions for economic downturns? What are the consequences if there are not? The instructor should circulate, listen to arguments and ask probing questions to get students to think in terms of the models. The second question includes an open-ended option for students to create their own policy. While creativity is wonderful, the instructor should be appropriately critical so that students propose semi-feasible policies and consider them seriously. 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. It is possible that a majority of students may think balancing the budget is a good idea. If so, the class should discuss why it has not happened; what are the political and economic factors that have contributed to continuing deficits? It is also useful to consider why other options were eliminated. The debt ceiling and the balanced budget amendment, for instance, have serious economic limitations. Students should be able to identify those and then either dismiss those policy options or propose them with caveats. 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 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.

Quiz grades provide evidence of preparedness and general understanding. Exams using application type questions assess the students' ability to meet the learning goal for this activity.