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Monetary policy starts in your own backyard

Content Standards and Benchmarks
National Council on Economic Education
Voluntary National Content Standards in Economics: 12.2, 20.7, 20.8, 20.9

Lesson Description
In this activity, students learn about the structure and functions of the Federal Reserve System, the Fed's role in formulating monetary policy, and how members of Reserve Banks' board of directors contribute to interest rate–setting decisions. Using simulations, students become members of the board of directors of a Reserve Bank, which allows them to observe and discuss the diverse makeup of boards throughout the Federal Reserve System. Other students become business leaders in the community, contributing economic intelligence to monetary policymaking.

One of the primary goals of the lesson is to demonstrate that monetary policymaking is enhanced by the grassroots economic information provided by Reserve Bank directors. When the Federal Open Market Committee (FOMC) makes decisions on interest rates, it does so with information from across the country, potentially including information from your hometown. In short, monetary policymaking "starts in your own back yard."

In the simulation, students will follow the information gathering process-from conducting a mock board of directors meeting, to composing a summary statement of their findings for the Reserve Bank's president to use at an FOMC meeting, with a recommendation on whether to raise, lower, or maintain interest rates.

Concepts
  • Structure and Function of the Federal Reserve System
  • Federal Open Market Committee (FOMC)
  • The Goals of Monetary Policy
  • Interest Rates (Discount Rate and Fed Funds Rate)
  • Inflation
  • Price Stability
Objectives
Students will
  1. Identify key terms such as interest rates, inflation, and monetary policy;
  2. Examine the work of the Federal Reserve System;
  3. Examine the diverse membership in place within a Federal Reserve Bank's Board of Directors; compare and contrast similarities and differences among members;
  4. Evaluate economic information to determine a recommendation for raising, lowering, or maintaining the current interest rate; and
  5. Explain their consensus opinion in a logical, coherent manner.
Related Content Areas
Civics/Government/Economics/Free Enterprise/Business Education

Time Required
2 (55 minutes) class periods

Materials
  1. Monetary Policy: Part Art, Part Science
    A DVD player, projector, and screen to show DVD OR a computer with an Internet connection.
    To stream this show in real time, click on the link above, or order the DVD to receive via mail.
  2. The Federal Reserve in Action PowerPoint presentation (printed out for each student)
  3. Board member biographies (one handout for each student playing role of board member)
  4. Board member questionnaire (one handout for each student playing role of board member)
  5. Board member economic discussion questionnaire (one handout for each student playing role of board member)
  6. Board member nameplates (one handout for each student playing role of board member)
  7. Business/industry leader profiles (one handout for each student playing role of business/industry leader)
  8. Business/industry leader questionnaire (one handout for each student playing role of business/industry leader)
  9. Business/industry leader identification badges (one handout for each student playing role of business/industry leader)
Procedure

Day 1 (55 minutes)
1. 20 minutes—Video presentation

Introduce the lesson by asking the question, "What are interest rates?" Encourage discussion. Show Monetary Policy: Part Art, Part Science. Tell your students that they are going to learn how interest rates are determined.

2. 15 minutes—PowerPoint presentation

Give each student a handout with slides from the PowerPoint presentation titled The Federal Reserve in Action. Present the slide show to the students, answering questions on the material as you go along. The presentation provides background information on
  • Structure and functions of the Fed;
  • Structure and role of Federal Reserve Banks' boards of directors;
  • Monetary policy goals and tools of monetary policy;
  • Importance of grassroots economic information gathered by board members; and
  • Inflation and price stability.
3. 20 minutes—Classroom activity preparation and homework assignment

Divide the students into groups of nine. These students will play the role of "board member." Have each group select a leader to be its chairperson. Assign at least three students (not including those in a board member group) to play the role of "business/industry leader." Give students appropriate handouts and have them read over all materials. Discuss homework assignments.

Each student participating as a board member receives
  • Board member biography;
  • Board member questionnaire;
  • Board member economic discussion questionnaire; and
  • Board member name plate.
Each student participating as a business/industry leader receives
  • Business/industry leader profile;
  • Business/industry leader questionnaire;
  • Business/industry leader identification badge; and
  • Board member economic discussion questionnaire to be used for the homework assignment.
Student Homework
Board members will need to answer the questions in the board member questionnaire and read the board member economic discussion questionnaire. Business/industry leaders will need to read the board member economic discussion questionnaire and find one or more articles pertaining to the industry they represent. [Note: Students may represent more than one industry. Newspapers, magazine articles, or reputable Internet sites are acceptable sources. This information will be used when board members interview business/industry leaders on Day 2.]

Teacher's Guidance
Explain to students that monetary policymaking is "part art, part science." The "science" part is conducted by the research economists who work at Reserve Banks' head offices. They examine statistics and data, creating computer models to try to gauge the economy's health and to forecast growth trends. The "art" part is based on the Fed's grassroots intelligence-gathering network through regional boards of directors across the country and by members of each Reserve Bank's research department.

Advise students participating as board members that they should not make interest rate recommendations based on their individual business needs; rather, they should use what they've been told to help form their judgment about appropriate monetary policy for the nation as a whole. Point out that the Fed values a diverse business composition of board members to help ensure that a variety of perspectives are considered. Policy should not be narrow minded but should be as fully informed as possible. For example, real estate developers should not recommend policy actions that are solely good for real estate but should definitely bring information to the table about what is happening in the real estate market to assist in making their recommendation on interest rate decisions.

Day 2 (55 minutes)

1. 10 minutes—Set up for group work
  • Have each group of nine board members move their desks into a circle to resemble a boardroom table; each board member should display his/her board member name plate.
  • Have students playing the role of business/industry leaders group loosely around the board member groups; each business/industry leader should wear his/her business/industry leader ID badge.
2. 20 minutes—Activity
  • Instruct board members to introduce themselves within their group using their board member biographies and board member questionnaires.
  • Instruct business/industry leaders to introduce themselves within their group using their business/industry leader questionnaires.
  • Have business/industry leaders discuss the homework articles they will use to answer questions posed by board members.
  • Have board members ask business/industry leaders questions using the board member economic discussion questionnaire.
  • Have groups of board members discuss and debate information they gathered from business/industry leaders and prepare a brief summary of economic conditions, along with their board's recommendation on whether to raise, lower, or maintain interest rates at their current level.
3. 15 minutes—Group summary statement and vote

After discussion ends, have each board chairperson stand and present the summary statement from that group to the class; then, have the chairperson call for a vote, or recommendation, on whether interest rates should be raised, lowered, or maintained at the current level. (The whole class should participate in the vote.)

4. 10 minutes—Closing activity

Review the following questions:
  1. What is monetary policy?
    A central bank's actions to influence the availability and cost of money and credit as a means of helping to promote national economic goals. The main tool used to implement monetary policy is open market operations.

  2. What is inflation?
    A rise in the general level of prices in the economy versus a relative price increase (i.e., energy).

  3. Who is the chairman of the Federal Reserve System?
    Ben S. Bernanke

  4. Where is your regional Federal Reserve Bank or branch?
    (Refer to the PowerPoint presentation map.)
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