economic homework 12

The purpose of this work is for you to experience the process of making monetary policy

decisions. You will be in charge of adjusting the Federal funds rate with the goal of hitting two

macroeconomic targets: Keeping the unemployment rate close to a level of 5% (the so-called

natural rate of unemployment), and keeping the inflation rate near a 2% target rate.

To participate you need to visit the website located at the Federal Reserve Bank of San Francisco

https://www.frbsf.org/education/teacher-resources/chair-federal-reserve-economy-simulation-

game/

At this site, you can gather additional information, or simply click on “Launch Game.” The

latter will take you to a page that provides details about how the simulation is played: I suggest

that you look over the “Your Job” page to get a feel for how the simulation works, what your job

is, etc. When you are ready to play, click on “Play Now” and this will take you to the simulation

site.

Everyone will start with the same data: The Federal funds rate is at 4.00%; the unemployment

rate is at 4.68%; and the inflation rate is at 2.11%. You begin the simulation by raising, cutting,

or leaving unchanged the Federal funds rate. Once you have made your decision, click on “Go”

and the effects of your decision are revealed by movements in the unemployment and inflation

rates. You will do this for 16 times (quarters) at which time the simulation is over, and you are

informed of whether you get to keep your job as Fed chair.

Your assignment is as follows:

1) Play the game (on your own!) five (

5

) separate times. Each quarter, write down your Federal

funds rate and the resulting unemployment and inflation rates. Once you have played the game

5

times, calculate the averages for your Federal funds rates, unemployment rates, and inflation

rates.

You must provide me with a spreadsheet of your data. If you do not, you will receive

zero points for this project.

(See attached for an example I did using three rounds. As you can

see, keeping the fund rate at 4% may not be the best strategy!)

2) Create two time-series plots: One is the average Federal funds rate and the average

unemployment rate; the chart shows is the average Federal funds rate and the average inflation

rate. (See attached are examples of the type of figures that I want.)

3) Discussion: In one page or less, explain how your policy actions changed from the first time

playing the game to the last. For example, did you try to offset changes in the unemployment

rate more than the inflation rate? How did you respond to the exogenous shocks over time? Was

this more difficult than you thought it would be? Did you keep your job? Keep some notes as

you play the game and see if your decision-making process changes with each simulation.

 

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