Fiscal policy during a prolonged recession.

This exercise can be used in an a principles of economics or macroeconomics class. Before doing this exercise students should have been introduced to the following topics: business cycles, economic growth, unemployment, inflation, budget deficit/surplus, aggregate model.

Overview

In this exercise students will be able to evaluate the effectiveness of different fiscal policies. Additionally, they will be asked to explain how fiscal policy can affect macroeconomic indicators during a recession. Students will be able to look at a case that goes beyond their standard business cycles exercise. By looking at current events and a specific case of a prolonged recession students will evaluate different policies and propose one that will have the least negative effect in an already struggling economy.

Expected Student Learning Outcomes

Students will be able to analyze macroeconomic data, identify different phases of a business cycle and make fiscal policy suggestions that would help an economy come out of a severe recession.

Information Given to Students

The economy of Greece has not been able to come out of the deep recession that it has been in since the financial crisis of 2008. In 2016 the following data were published about the Greek economy.

Real GDP%: -4.3% (2009) to -0.2% (2016)
Unemployment%: 10% (2009) to 23% (2016)
Inflation: 1.2% (2009) to -0.8% (2016)
Government spending over that past decade has remained stable around 20% of GDP.
Tax revenues (% of GDP) have increased from 19%(2009) to 27% (2016).
National Debt to GDP ratio: 127% (2009) to 180% (2016).

Which of the following policies do you think is best for reversing the current situation? Consider the implications on economic activities of all choices and form a detailed response as to why you chose one of them.
A. Increase taxation but keep government spending stable.
B. Increase taxation and at the same time increase government spending through the increase in public sector jobs.
C. Introduce tax cuts for employers that hire workers.
D. Decrease taxation on low and middle income households and increase government spending.
E. Decrease taxation on high income households and keep government spending stable.

Student handout for recession application exercise (Microsoft Word 14kB Sep2 18)

This activity requires the application exercise to be printed out and handed to the teams along with four cards with the letters of each option to use for simultaneous reporting at the end of the activity.
Students should have 20-30 minutes to discuss in groups of 4-5 and allow for another 20-30 minutes for debriefing. If class size is small this activity could fit in an entire class period (60-90 minutes).

Since applying these concepts in a specific country requires some prior knowledge on the said country, instructors are advised to research the topic in advance. They can have a look at the following articles before handing out this exercise to students and can also use them during debriefing.

Greece's debt crisis

Why trust the Greeks

Greece's messy fiscal policy

The point of this exercise is for students to understand that any policy has implications on different macroeconomic indicators and when choosing a policy one should be aware of that. Instructors should note that Greece has been having rising debt even as tax revenues as percent of GDP have risen. Also, government spending actually has been falling as GDP was falling.

At the end of the exercise, students should be able to also graphically show how their choice will have the desired effect. Once this is discussed in class from the perspective of every team the teacher can summarize the findings and lead a concluding discussion by using the following questions:

What state is the economy in? If you chose to apply fiscal policy what exactly did you decide to do to taxes and government spending? What more information would you need in order to make a more informed policy suggestion?

When the assigned time for the activity is over teams will simultaneously report their answers by showing the equivalent answer card. After they report their findings each team will have to explain their answer. It is advised that the reporter from each team should be randomly chosen on the spot so that all students during the activity equally participate and can justify their teams' choice in the end.
During the activity the teacher should circulate the classroom and try to clarify the activity for those who might be having issues applying the economic theory they have learned into choosing an answer.

The activity could be enhanced if the instructor feels it is necessary that students have more data available. If this is the case then students during the activity could access the World Bank website to find values for indicators in more years than the ones provided.
I use the World Bank development indicators in my classes, instructors are free to use any other resources that have data for this specific country.