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Economic Data Lesson: Economic Policy Options

This is the final lesson in a series of lessons that introduces students to the economic data that economists use to assess the health of the economy. This lesson focuses on assessing the health of the economy using the content learned in the previous lessons, and introduces the role of monetary policy to influence the economic growth, inflation, and employment.

Introduction

ESSENTIAL QUESTION: What do current economic data say about the health of the economy?

This lesson is part of a series that asks students to assess the current health of the economy by examining current economic data. This lesson focuses on assessing current economic conditions by examining key economic indicators: Real GDP, unemployment rate, and inflation rate. All are available on the St. Louis Fed’s FRED data website. Students will access current economic data, analyze the data based on their understanding of economics, and recommend possible changes to monetary policy. 

Learning Objectives

  • Analyze the most recently reported data on economic growth (real GDP), inflation, and unemployment rate.
  • Explain the relationship between labor market data, the unemployment rate, inflation, and economic growth.
  • Evaluate information provided in the FOMC economic projections.
  • Assess the data to determine whether the economy indicates a need for monetary policy adjustments.
  • Recommend potential changes to interest rates to improve the economy.  

Resource List

Process

1.     Ask the students if they have been to the doctor for a health check-up recently. Remind students of the routine: A nurse likely started the process with some routine tests to collect information – perhaps she strapped a band around your arm and pumped it full of air to test your blood pressure. Then she might have taken your temperature, looked in your ears and eyes with a light, and tested your reflexes with a small hammer. 

2.     Ask the students why all of this was necessary. Students might suggest that the nurse is collecting information about how your body is functioning. Tell students that this process is “data collection.”

  • The nurse collected relevant information on your health to be assessed by the doctor. The initial data check helped the doctor identify potential problems – determining if there were any data that seemed out of order.
  • If everything checked out, the doctor likely gave you her assessments, maybe some advice on eating healthy and exercising, and bid farewell until your next appointment.
  • If, however, the data showed some irregularities, the doctor likely asked for further tests – collecting more data to observe.
  • Many times, the doctor’s diagnosis requires treatment – prescription medicines or even surgery.
  • All of this is meant to check the state of your health, and if it is needed, to use treatment strategies to return you to health.

3.     Tell the students that the economy, like the human body, is extremely complex. And, like the body, most times the economy functions very well on its own. However, there are times when the economy suffers maladies such as recessions, or periods of high inflation that require treatment. And like the body, early detection of potential problems will prevent more serious issues and will likely mean less invasive treatment.

4.     Tell the students that economists use economic data to assess the health of the economy. And, economists, use economic data to assess whether treatment is necessary.

5.     Tell the students thatfor this lesson will they will assess the data, and then decide if any treatment is necessary. If indeed it is necessary, they will recommend possible economic policy changes.

6.     Tell the students that economists use a variety of data to assess the health of the economy. In this exercise, they will check the most important economic indicators: Real GDP, the unemployment rate, and the inflation rate. If students have not already done so, it might be beneficial for them to finish the individual data lessons in the “Is the Economy Healthy?” series.

7.     Display Visual 1: Economic Data Review. Review information and highlight how some data series influence others.

8.     Tell students that most economists believe that the economy tends be relatively stable and resilient. It adjusts to changes and it tends to move towards its long run potential. However, economic shocks sometimes alter an economy’s path. A shock can be something like a natural disaster, financial crisis, or other events that impact aggregate (total) demand or supply in the economy.

9.     When shocks occur, the use of economic policy is sometimes warranted to move the economy back toward its potential.

10.  Display Visual 2: Key Facts about the Federal Reserve to review information about the Federal Reserve.

11.  The Federal Open Market Committee, or FOMC, makes decisions about economic policy. For a brief overview of the FOMC, watch this short video

12.  Economic policy can be challenging because there is a time lag between the change in policy and the effect on the economy. To experience a FOMC policy making simulation, play a round (or two) of Chair the Fed with students.   

•       Ask students how news events affected the economy. [Unemployment and inflation increased and decreased based on changes to the economy.]

•       Ask students to explain what made the game difficult. [There was a lag between the time when you lowered or raised the interest rate and the resulting changes in inflation and unemployment; new economic shocks hit the economy while you were making adjustments.]

13.  Tell the students that this lesson will have them examine and assess economic data to determine if economic policy might be necessary. Tell the students that Federal Reserve economists use sophisticated models to assess the economy. This lesson will use a very simple method – comparing recent and current data to FOMC projections.

14.  Distribute Activity 1: Using Data to Discuss Policy Options and refer students to the Economic Data Dashboard. Have students readin the information at the top of the page, and then use the data and graphs on the economic data dashboard to fill in columns 1 (current data) and 2 (recent trend).

15.  The Federal Reserve provides economic projections four times per year. These can be found on this page: https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm

•       Scroll down the page to find the most recent release. They are listed as “projection materials” and available as either PDF or HTML.

•       After opening the document or webpage, notice that there is quite a lot of information provided on the page. Make sure students are getting the longer-run range data, which are provided on the right edge of the table in either PDF or HTML. Use the information to complete column 3 (longer-run range).

•       Remind students that the Federal Reserve has a goal of 2 percent inflation and the FOMC has communicated that its longer run projections can be interpreted as the economy’s normal or trend rate of growth and its normal unemployment rate over the longer run.

•       Tell the students that this information can be used to assess the current state of the economy. At times, economic policy might be needed to move the economy back to a healthy state.

16.  Give students time to complete Activity 1: Using Data to Discuss Policy Options.

17.  Discuss key content with students to ensure they collected the correct data from the sources. Then ask the students to describe their assessment, and if they propose a change to monetary policy (using data to defend their reasoning).

Conclusion

Economists study a variety of economic data, but these tend to gain the most attention: the unemployment rate, the inflation rate, and the Real GDP growth rate. These three sets of data are important to the Federal Reserve because they help indicate whether they are achieving their dual mandate goals of price stability and maximum sustainable employment. Economies are fairly resilient. However, there are times when monetary policy can be used for high unemployment or high inflation; to help achieve the dual mandate goal of price stability and maximum employment. Economic data and information supplied by the FOMC can be useful in thinking about effective monetary policy decisions.

Extension Activity

Play another game (or two) of Chair the Fedthen describe whether the knowledge you learned while completing this lesson has changed the way you interpreted the data and played the game.

Assessment

The Federal Reserve’s policy goal for inflation is:

A.     An inflation rate of zero.

B.     An inflation rate of one percent.

C.     An inflation rate of two percent.

D.    An inflation rate of three percent.

The group within the Federal Reserve that makes economic policy decisions is:

A.     The Board of Governors

B.     The Presidents of Federal Reserve Banks

C.     The FOMC

D.    The FRED

How are these economic data related to the business cycle?

A.     When the economy is expanding, the unemployment rate is rising.

B.     When the economy is expanding, real GDP rate is rising.

C.     When the economy is contracting, the unemployment rate is falling.

D.    When the economy is contracting, real GDP rate is rising.

Essay

Explain how interest rate policy could be used to achieve price stability and maximum sustainable employment using the economic conditions described in the table below. In your answer, be sure to explain what each indicator is telling you about the current economic conditions.

Change in Real GDP (current)

Change in Real GDP (longer-run projection)

Unemployment Rate (current)

Unemployment Rate (longer-run projection)

Inflation Rate (current)

Inflation Rate (longer-run projection)

4.7

1.6 – 2.2

3.7

4.5 – 5.0

2.6

2


The economic indicators above describe an economy that is growing very quickly – at a rate that is not sustainable in the long-run. Real GDP is growing faster than the long-run or normal growth rate, the unemployment rate has dropped below “full employment” levels, and inflation has risen above the Fed’s 2 percent goal for price stability. While the inflation rate is not too far off the mark, the Real GDP growth rate and unemployment rate suggest that it will continue to rise. As such, the Federal Reserve might increase interest rates to reduce the likelihood of rising inflation. As interest rates rise, consumers and firms will decide that some purchases and investments are no longer feasible. As the change in spending works its way through the economy, the inflation rate will likely move back to the Fed’s 2 percent goal and the Fed will adjust its monetary policy tools to move interest rates back to a normal level.