Foundations of the Modern World - Interest Rates, Unemployment, and Inflation
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Lab Description
This lab consists of two main elements:
- “Building Knowledge” activities where students learn the fundamental concepts of how Interest Rates affect Economic Activity, Unemployment, and Inflation.
- A first-person simulation called “Beat the Fed” where students use their knowledge to manage a modern economy.
Both of these elements provide a high degree of student interaction and opportunities for classroom demonstrations and discussions.
The building knowledge activities are presented using a narrative where the students have been sent back in time and must help the leaders of ancient Sumer use Interest Rates to stabilize their Bronze Age economy. This results in economic concepts that are directly analogous to their modern equivalents but are much simpler to explain and demonstrate. The simplification is the result of the Bronze Age Economy not having the subsequent 5000 years of the invention (trade, fiat money, stock markets, credit instruments, etc) that may cause unnecessary complexity if concepts are introduced in the modern economy.
Students learn a series of cause-effect relationships starting with Interest Rates affecting the Number of Fields Planted by Farmers which then leads to effects on Unemployment and Inflation Rates as shown below:
The lab can be run in two days with students being expected to complete a small amount of work outside of class or three days with less outside work and the inclusion of several bonus activities. It is critical that students learn the basic relationships shown on the previous page during the Building Knowledge phase so that these concepts can be reinforced during the Beat the Fed simulation. The ActiveLearningLabs Teacher Console provides real-time reporting of activity completion and score for all students. Since the Building Knowledge Phase includes nearly a dozen activities, you should have a clear picture of student mastery of the content and their readiness for the simulation.
EconLib -
Government and Economics
Fiscal policy is the use of the government budget to affect an economy. When the government decides on the taxes that it collects, the transfer payments it gives out, or the goods and services that it purchases, it is engaging in fiscal policy. The primary economic impact of any change in the government budget is felt by particular groups—a tax cut for families with children, for example, raises the disposable income of such families. Discussions of fiscal policy, however, usually focus on the effect of changes in the government budget on the overall economy….
EconLib -
Government and Economics
A good way of judging the size of the federal debt, and hence its likely effect on the economy, is, as for an individual, to take it as a ratio of income. The federal debt reached a peak ratio of 114 percent of GDP after World War II and declined to 26 percent by 1981, before rising again. But even with the subsequent deficits, it was still only 51 percent of GDP in 1992. True “balance” in the budget, it might be suggested, would entail not a zero deficit, but one such that the debt grows at the same percentage rate as GNP, thus keeping the debt-to-GNP ratio constant….
EconLib -
Government and Economics
What Is the Money Supply? The U.S. money supply comprises currency—dollar bills and coins issued by the Federal Reserve System and the Treasury—and various kinds of deposits held by the public at commercial banks and other depository institutions such as savings and loans and credit unions. On June 30, 1990, the money supply, measured as the sum of currency and checking account deposits, totaled $809 billion. Including some types of savings deposits, the money supply totaled $3,272 billion. An even broader measure totaled $4,066 billion.
These measures correspond to three definitions of money that the Federal Reserve uses: M1, a narrow measure of money’s function as a medium of exchange; M2, a broader measure that also reflects money’s function as a store of value; and M3, a still broader measure that covers items that many regard as close substitutes for money….
EconLib -
Government and Economics
Inflation is the loss in purchasing power of a currency unit such as the dollar, usually expressed as a general rise in the prices of goods and services….
We have many measures of inflation, but none provides a truly reliable gauge of inflation at any specific time. The most widely watched measure is the consumer price index (CPI), published monthly by the Bureau of Labor Statistics. Subindexes are available for different cities and for many different classes of goods and services….
EconLib -
Government and Economics
Inflation is the loss in purchasing power of a currency unit such as the dollar, usually expressed as a general rise in the prices of goods and services….
We have many measures of inflation, but none provides a truly reliable gauge of inflation at any specific time. The most widely watched measure is the consumer price index (CPI), published monthly by the Bureau of Labor Statistics. Subindexes are available for different cities and for many different classes of goods and services….
EconLib -
Government and Economics
Each month, the federal government’s Bureau of Labor Statistics randomly surveys sixty thousand individuals around the nation. If respondents say they are both out of work and seeking employment, they are counted as unemployed members of the labor force. Jobless respondents who have chosen not to continue looking for work are considered out of the labor force and therefore are not counted as unemployed….
EconLib -
Government and Economics
The United States and all other modern industrial economies experience significant swings in economic activity. In some years most industries are booming and unemployment is low; in other years most industries are operating well below capacity and unemployment is high. Periods of economic expansion are typically called booms; periods of economic decline are called recessions or depressions. The combination of booms and recessions, the ebb and flow of economic activity, is called the business cycle….
EconLib -
Government and Economics
A property right is the exclusive authority to determine how a resource is used, whether that resource is owned by government or by individuals. Society approves the uses selected by the holder of the property right with governmental administered force and with social ostracism. If the resource is owned by the government, the agent who determines its use has to operate under a set of rules determined, in the United States, by Congress or by executive agencies it has charged with that role….
EconLib -
Macroeconomics
Whenever people decide whether the advantages of a particular action are likely to outweigh its drawbacks, they engage in a form of benefit-cost analysis….
EconLib -
Macroeconomics
The term entrepreneur, which most people recognize as meaning someone who organizes and assumes the risk of a business in return for the profits, appears to have been introduced by Richard Cantillon (1697-1734), an Irish economist of French descent. The term came into much wider use after John Stuart Mill popularized it in his 1848 classic, Principles of Political Economy, but then all but disappeared from the economics literature by the end of the nineteenth century….
EconLib -
Macroeconomics
Interest is the price people pay to have resources now rather than later. Resources, of course, can be anything from college tuition to a big-screen TV. Interest is conventionally expressed as a percentage rate for a period of one year. If borrowers (those who want resources now) can obtain the resources from lenders (those who are willing to surrender current control) on the condition that they return 103 percent of the resources one year later, then the interest rate is 3 percent….
EconLib -
Macroeconomics
The U.S. money supply comprises currency—dollar bills and coins issued by the Federal Reserve System and the Treasury—and various kinds of deposits held by the public at commercial banks and other depository institutions such as savings and loans and credit unions….
EconLib -
Microeconomics
Interest is the price people pay to have resources now rather than later. Resources, of course, can be anything from college tuition to a big-screen TV. Interest is conventionally expressed as a percentage rate for a period of one year. If borrowers (those who want resources now) can obtain the resources from lenders (those who are willing to surrender current control) on the condition that they return 103 percent of the resources one year later, then the interest rate is 3 percent….
EconLib -
Microeconomics
Credit is the ability of an individual or organization to obtain goods or services before payment, based on an agreement to pay later.
EconLib -
Microeconomics
Inflation is the loss in purchasing power of a currency unit such as the dollar, usually expressed as a general rise in the prices of goods and services….
We have many measures of inflation, but none provides a truly reliable gauge of inflation at any specific time. The most widely watched measure is the consumer price index (CPI), published monthly by the Bureau of Labor Statistics. Subindexes are available for different cities and for many different classes of goods and services….
EconLib -
Microeconomics
Supply and Demand: Prices play a central role in the efficiency story. Producers and consumers rely on prices as signals of the cost of making substitution decisions at the margin. How are prices determined?
Economic theory says that the price of something will tend toward a point where the quantity demanded is equal to the quantity supplied. This price is known as the market-clearing price, because it “clears away” any excess supply or excess demand.
Market clearing is based on the famous law of supply and demand. As the price of a good goes up, consumers demand less of it and more supply enters the market. If the price is too high, the supply will be greater than demand, and producers will be stuck with the excess. Conversely, as the price of a good goes down, consumers demand more of it and less supply enters the market. If the price is too low, demand will exceed supply, and some consumers will be unable to obtain as much as they would like at that price—we say that supply is rationed….
EconLib -
Microeconomics
The most basic laws in economics are those of supply and demand. Indeed, almost every economic event or phenomenon is the product of the interaction of these two laws. The law of supply states that the quantity of a good supplied (that is, the amount that owners or producers offer for sale) rises as the market price rises, and falls as the price falls. Conversely, the law of demand says that the quantity of a good demanded falls as the price rises, and vice versa. (For reasons unknown, economists do not really have a “law” of supply, though they talk and write as though they did.)…
Economists often talk of supply “curves” and demand “curves.” A demand curve traces the quantity of a good that consumers will buy at various prices. As the price rises, the number of units demanded declines. That is because everyone’s resources are finite; as the price of one good rises, consumers buy less of that and more of other goods that now are relatively cheaper. Similarly, a supply curve traces the quantity of a good that sellers will produce at various prices. As the price falls, so does the number of units supplied…
EconLib -
Microeconomics
One of the most important building blocks of economic analysis is the concept of demand. When economists refer to demand, they usually have in mind not just a single quantity demanded, but what is called a demand curve. A demand curve traces the quantity of a good or service that is demanded at successively different prices.
The most famous law in economics, and the one that economists are most sure of, is the law of demand. On this law is built almost the whole edifice of economics. The law of demand states that when the price of a good rises, the amount demanded falls, and when the price falls, the amount demanded rises….
EconLib -
Microeconomics
Inflation is the loss in purchasing power of a currency unit such as the dollar, usually expressed as a general rise in the prices of goods and services….
We have many measures of inflation, but none provides a truly reliable gauge of inflation at any specific time. The most widely watched measure is the consumer price index (CPI), published monthly by the Bureau of Labor Statistics. Subindexes are available for different cities and for many different classes of goods and services….
EconLib -
Microeconomics
Supply and Demand: Prices play a central role in the efficiency story. Producers and consumers rely on prices as signals of the cost of making substitution decisions at the margin. How are prices determined?
Economic theory says that the price of something will tend toward a point where the quantity demanded is equal to the quantity supplied. This price is known as the market-clearing price, because it “clears away” any excess supply or excess demand.
Market clearing is based on the famous law of supply and demand. As the price of a good goes up, consumers demand less of it and more supply enters the market. If the price is too high, the supply will be greater than demand, and producers will be stuck with the excess. Conversely, as the price of a good goes down, consumers demand more of it and less supply enters the market. If the price is too low, demand will exceed supply, and some consumers will be unable to obtain as much as they would like at that price—we say that supply is rationed….
EconLib -
Microeconomics
The most basic laws in economics are those of supply and demand. Indeed, almost every economic event or phenomenon is the product of the interaction of these two laws. The law of supply states that the quantity of a good supplied (that is, the amount that owners or producers offer for sale) rises as the market price rises, and falls as the price falls. Conversely, the law of demand says that the quantity of a good demanded falls as the price rises, and vice versa. (For reasons unknown, economists do not really have a “law” of supply, though they talk and write as though they did.)…
Economists often talk of supply “curves” and demand “curves.” A demand curve traces the quantity of a good that consumers will buy at various prices. As the price rises, the number of units demanded declines. That is because everyone’s resources are finite; as the price of one good rises, consumers buy less of that and more of other goods that now are relatively cheaper. Similarly, a supply curve traces the quantity of a good that sellers will produce at various prices. As the price falls, so does the number of units supplied….
EconLib -
Microeconomics
One of the most important building blocks of economic analysis is the concept of demand. When economists refer to demand, they usually have in mind not just a single quantity demanded, but what is called a demand curve. A demand curve traces the quantity of a good or service that is demanded at successively different prices.
The most famous law in economics, and the one that economists are most sure of, is the law of demand. On this law is built almost the whole edifice of economics. The law of demand states that when the price of a good rises, the amount demanded falls, and when the price falls, the amount demanded rises….
EconLib -
Basic Economics
The main reason economists believe so strongly in the law of demand is that it is so plausible, even to noneconomists. Indeed, the law of demand is ingrained in our way of thinking about everyday things. Shoppers buy more strawberries when they are in season and the price is low. This is evidence for the law of demand: only at the lower, in-season price are consumers willing to buy the higher amount available. Similarly, when people learn that frost will strike orange groves in Florida, they know that the price of orange juice will rise. The price rises in order to reduce the amount demanded to the smaller amount available because of the frost. This is the law of demand. We see the same point every day in countless ways. No one thinks, for example, that the way to sell a house that has been languishing on the market is to raise the asking price. Again, this shows an implicit awareness of the law of demand: the number of potential buyers for any given house varies inversely with the asking price….
EconLib -
Basic Economics
The most basic laws in economics are those of supply and demand. Indeed, almost every economic event or phenomenon is the product of the interaction of these two laws. The law of supply states that the quantity of a good supplied (that is, the amount that owners or producers offer for sale) rises as the market price rises, and falls as the price falls. Conversely, the law of demand says that the quantity of a good demanded falls as the price rises, and vice versa. (For reasons unknown, economists do not really have a “law” of supply, though they talk and write as though they did.)…
Economists often talk of supply “curves” and demand “curves.” A demand curve traces the quantity of a good that consumers will buy at various prices. As the price rises, the number of units demanded declines. That is because everyone’s resources are finite; as the price of one good rises, consumers buy less of that and more of other goods that now are relatively cheaper. Similarly, a supply curve traces the quantity of a good that sellers will produce at various prices. As the price falls, so does the number of units supplied….
EconLib -
Basic Economics
A producer is someone who creates and supplies goods or services. Producers combine labor and capital—called factor inputs—to create—that is, to output—something else. Business firms are the main examples of producers and are usually what economists have in mind when talking about producers. However, governments are producers of some kinds of services—such as police services, defense, public schools, and mail delivery—and sometimes goods, such as when a government owns the oil fields and oil production (for example, OPEC). Households and individuals are producers of non-market goods and services such as cleaning, child-rearing, cooked food, etc. Entrepreneurs, by contrast, are idea-creators. They often also start off their ideas as producers.
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