Masters of the Economy: A Game for Review and Understanding of Fiscal and Monetary Policy

Masters of the Economy:
A Game for Review and Understanding of Fiscal and Monetary Policy




Mary Eschelbach Hansen

Department of Economics
American University
4400 Massachusetts Ave. NW
Washington DC 20016
202-885-3793
fax: 202-885-3790
mhansen@american.edu


Mary Eschelbach Hansen is Assistant Professor of Economics at American University (e-
mail: mhansen@american.edu). She is grateful for the feedback provided by Brad
Hansen, members of the AU economics department, and her Principles of
Macroeconomics students.

1

---

Masters of the Economy:
A Game for Review and Understanding of Fiscal and Monetary Policy

Abstract: In this classroom game, pairs or teams of students assume the role of “Masters
of the Economy,” or directors of fiscal and monetary policy. The game has three
versions; versions progress in complexity. The first version provides a review of the
basics of monetary and fiscal policy tools. The second version introduces uncertainty:
actual economic performance may not match the targets set by the team. The third
version introduces the problem of coordination between monetary and fiscal policy
authorities.

Key words: classroom game, fiscal policy, monetary policy
JEL Codes: A2, E5, E6


1

---

Economists tend to rely on lecture to convey material in the first course in
economics (Becker and Watts 1996, Benzing and Christ 1997). Lecture may be an
efficient technology for the transfer of information, but it is not an efficient technology
for the development of economic intuition. This game adds to the growing literature on
games, demonstrations, and simulations for use in courses in macroeconomics (for
example, Hazlett and Hill 2003; Truscott, Rustogi and Young 2000). The purpose of this
game is to give students a feel for, or intuition about, the difficulty of realizing monetary
and fiscal policy targets.
After students first learn the basics of monetary and fiscal policy, they are
sometimes surprised that business cycles still exist. They ask, “If we have these policy
tools, why can’t we make GDP behave nicely?” This game allows students to experience
the difficulties of formulating and coordinating fiscal and monetary policy for steady
growth.1 Students use common policy tools to attempt to achieve a constant three percent
growth in GDP in their economy.
The most basic version of the game prompts students to categorize policy tools as
either monetary or fiscal policy. Students then choose a specific policy action, such as a
decrease in taxes, and indicate how it is expected to effect GDP. Finally, students
calculate the magnitude of the desired effect. In the basic version, there is no uncertainty;
the students’ desired effect is equal to the actual effect. A second version of the game is
more realistic. The student’s desired effect may not obtain because of uncertainty. In a
third version of the game, the teams of students divide into separate monetary and fiscal
authorities. The more complex second and third versions of the game provide excellent
intuition as prelude to discussion of impediments to policy effectiveness. As incidental

2

---

bonuses, the pencil and paper version of the game allows students to practice calculating
percentages and graphing time trends, although there is a version of the game that uses an
Excel workbook to crunch the numbers.
Masters of the Economy may be used effectively during class or as a group
homework assignment. It is possible to complete all three versions the game in one hour
using an Excel workbook; when students do their own calculations the first two versions
can be completed in a single class period.

Mastering the Game
Students play in pairs or small groups. Each group is the macroeconomic policy
team for its own economy. Each group is challenged to direct macroeconomic policy so
that the economy maintains a steady three percent growth rate. The team that comes
closest to steady three percent growth wins. In the case of a tie, the winner is the team
with the smallest standard deviation of growth rates, i.e., the winner is the team that
manages the most stable economy.
Game materials include instructions for the three versions of the game, a record
table for each version to track policy actions, one chart to graph results, a set of 12
“POLICY” cards, and a set of 12 “UNCERTAINTY” cards. Complete materials appear
in Appendix A. All of the game materials, including instructions and the Excel file
template are available at http://www.american.edu /academic2/ ~mhansen.html.)
To begin play, students draw a POLICY card which names the policy tool that
will be used in the current period. There are two POLICY cards for each of the major
tools (taxes, government spending, open market operations, and the discount rate). There

3

---

is one POLICY card for the required reserve ratio. Students review how the tool is used,
decide upon an action (such as “increase taxes” or “sell government securities” and how
the action is expected to influence GDP. Students decide on a desired change in GDP
and check their progress towards steady three percent growth. Three of the POLICY
cards describe exogenous shocks to the economy. These cards instruct the students about
how the shock changes GDP; students record this change and proceed to the next period,
in which they choose a new POLICY card.
Table 1 shows a completed record table from the Excel workbook. Three periods
of the game have been completed. The starting GDP is 100 billion doodles (doodles are
the currency of the economy). In the first period, the team drew a tax POLICY card. The
team recorded that taxation is a fiscal policy and decided to lower taxes to push GDP up a
targeted 3 billion. In the second period the team drew a POLICY card indicating there
was a negative exogenous shock to the economy that reduced GDP by 10 billion. In the
third period the team drew an open market operations POLICY card. They recorded that
open market operations are monetary policy, decided to buy government securities to
increase GDP by a target of 16 billion doodles. Their choice brought ending GDP close
to the steady cumulative 3% mark.
After Mastering the basic game, teams proceed to a more realistic version. While
fundamentals of the game are unchanged, an element of uncertainty is added. After
students draw the POLICY card and decide on the desired change in GDP, they draw an
UNCERTAINTY cards. UNCERTAINTY cards have numbers between 0.25 and 1.75.
The values are roughly normally distributed. Students calculate the product of their
desired change in GDP and the UNCERTAINTY card value to arrive at the actual change

4

---

in GDP experienced in the period. Incorporating the UNCERTAINTY card value gives
students a feel for how consumers, banks and business can thwart the best efforts of
policy makers.
Table 2 shows a completed record table in Excel after the fifth period of the
second version of the game. In the first period the team drew the government spending
POLICY card and marked that government spending is fiscal policy. They decided to
increase spending to increase GDP. The target increase in GDP was 3 billion, but they
drew an UNCERTAINTY card with value 1.2, so the ending GDP was not 103 billion
but 103.6 billion. In the second period the team drew the discount rate POLICY card and
recorded that the discount rate is monetary policy. The team decided to increase the
discount rate to make up for overshooting in the first period, and they set the target
change in GDP at 1 billion. The drew an UNCERTAINTY card with value of 0.75, so
ending GDP was 104.4 billion—lower than they had targeted. In the third period the
team drew the tax POLICY card and aimed to increase GDP by lowering taxes, but
wound up overshooting their target because of a high UNCERTAINTY card value. In
the fourth period the team experienced an exogenous shock that pushed GDP down by 15
billion. In the fifth period the team stimulated the economy by decreasing taxes further.
Their target change was 17 billion. An UNCERTAINTY card value of 1.1 brought them
back to the cumulative 3% growth target of 115.9 billion.
In the third and most complex version of the game, teams split into two groups.
One group becomes the fiscal authority, the other group becomes the monetary authority.
Students set aside the POLICY cards describing the exogenous shocks and separate the
fiscal POLICY cards from the monetary POLICY cards. The fiscal and monetary

5

---

authorities are not allowed to cooperate or consult. Each group within the team draws a
POLICY card as before; POLICY cards are used more than once in this version of the
game. After each group has chosen its target GDP, play resumes as a single team. The
team draws an UNCERTAINTY card and calculates the total change in GDP as (change
due to fiscal policy+change due to monetary policy)*UNCERTAINTY card value. This
variation of the game gives students a feel for the difficulty of coordinating monetary and
fiscal policy.
Table 3 shows a completed record table in Excel of the third version of the game
after two periods. The fiscal authority drew a tax POLICY card, and the monetary
authority drew an open market operations POLICY card. They recorded the necessary
information and each authority aimed to increase GDP by the desired three percent. The
UNCERTAINTY card value was greater than one, so that the combined effect of the
monetary and fiscal policies was much higher than the target. In the second period, the
fiscal authority drew a government spending POLICY card, and the monetary authority
drew a discount rate POLICY card. Both groups set more modest targets in the second
period. When the targets were combined with the UNCERTAINTY card value, the team
brought ending GDP close to the steady 3% growth target.
The game can be easily adapted to incorporate review of the money multiplier and
the government spending multiplier. The most straightforward way to include the
multiplier effects is to announce the values of the marginal propensity to consume and the
required reserve ratio at the start of the game. Instruct students to be specific in the
actions taken. For example, rather than simply choosing an increase in taxes, students

6

---

should chose an amount for the tax increase that, in combination with the multiplier, will
yield the desired target change in GDP.
After the game is played, students are better prepared to discuss the ways in
which individuals, households, firms and banks can thwart the intentions of
policymakers. They are also ready to discuss the political economy of macroeconomic
policy. Some questions for discussion appear in Appendix B.

Conclusion
In this game, students have a chance to review the concepts of fiscal and
monetary policy. They experience first-hand the difficulty of using policy tools to
manage the business cycle, and they discover that a lack of coordination between
monetary and fiscal authorities makes the job of providing for steady growth even harder.

7

---

References
Becker, W. E. and M. Watts. 1996. Chalk and talk: A national survey on teaching
undergraduate economics. American Economic Review 86 (May): 448-53.
Benzing, C. and P. Christ. 1997. A survey of teaching methods among economics
faculty. Journal of Economic Education 28(Spring): 182-87.
Hazlett, D. and C. D. Hill. 2003. “Calculation the candy price index: a classroom
inflation experiment.” Journal of Economic Education 34(Summer): 214-223.
Truscott, M., H. Rustogi, and C. B. Young. 2000. “Enhancing the macroeconomics
course: an experiential learning approach.” Journal of Economic Education
31(Winter): 60-65.

8

---

1 The game improves upon a game written by Charles A. Stull and published the Classroom Activities
ancillary for the first edition of N. Gregory Mankiw’s Principles of Economics. The game described here is
clearer for students than the original because it breaks the concepts to be mastered into separate versions of
the game. Further, this game goes beyond the topics covered in the previously game. This game also
provides more detailed instructions for both teachers and students; these instructions make the game useful
as a homework assignment. Finally, this game offers the option of using an Excel workbook to aid in play.

9

---