Using Long and Variable in class

These activities assume students have seen the AD–AS model (C&T ch. 13) and are starting, or have finished, the chapters on the Fed and monetary policy (ch. 15–16).

1. Demo: what happens if the Fed does nothing (15 minutes)

1. Open Instructor, leave the shock on Random, tick Classroom demo, and start. The game holds the funds rate and plays a quarter every two seconds. (Or use a link such as /long-and-variable/?demo=1&seed=2027.)
2. Point out the goals on the chart: 2% inflation (orange dashed line) and the natural rate of unemployment (blue dashed line). Point out the funds rate (green line) and that it starts near its neutral level of about 4%.
3. Have students record each quarter’s inflation, unemployment and funds rate, and the headline.
4. At the end, the results screen names the shock and shows what a Taylor rule would have done with the same shocks.

Debrief questions:

• Which curve did the shock move first, AD or LRAS? How could you tell from the headlines and from the AD–AS panel?
• What were the worst values of inflation and unemployment?
• Why did inflation expectations (SRAS) keep moving even after the shock faded?
• What should the Fed have done, and when?

2. Students play (20–30 minutes, pairs work well)

Each pair plays at least two games. Ask them to keep a one-line log per quarter: the rate they chose and why.

To give the whole class the same economy, choose a shock and a seed in the Instructor panel and share the link it shows (for example /long-and-variable/?scenario=oil&seed=31). Results are then directly comparable, and the class can discuss why some pairs did better.

Suggested assignment of shocks:

3. Discussion prompts

• Lags. Rate changes take a few quarters to work (C&T: “uncertain lags”). Did you overreact? Did you wait too long?
• Real rates. When inflation expectations rose, what happened to the real interest rate if you left the funds rate alone? Why must the funds rate rise by more than inflation to cool the economy?
• The dilemma. In the oil-shock game, could any policy have kept both inflation and unemployment on target? Which goal did you prioritize?
• Credibility. What happened to the credibility meter when inflation stayed high? How did that change the cost of bringing inflation down?
• Long and variable lags. Play the same seed and shock twice, once with the Policy lags slider at the default and once at Long and variable. How did you change your strategy? Did you overshoot because the first moves seemed to do nothing?
• Starting credibility. Give half the class an economy with starting credibility at 100% and the other half the same seed and shock at 0–20%. Which group needed bigger rate moves? Why did inflation expectations (the SRAS curve) take longer to settle without credibility?
• Moving up LRAS. With anchoring switched off (?scenario=none&quarters=24&anchor=0), cut the funds rate to zero for six quarters, then each quarter set it to 2% plus expected inflation. Where does the economy end up on the AD–AS diagram? Compare with C&T’s long-run effect of a permanent increase in money growth. Then try holding the rate at zero: why does inflation keep accelerating?
• Rules vs. discretion. Did you beat the Taylor rule? In which shocks did discretion help, and where did the rule do better?
• The zero lower bound. In the financial crisis, what happened when the rate hit zero? How effective was QE compared with a rate cut?

4. Homework ideas

1. Play three games. Attach the results screen (or the copied data table) and answer: which shock hit, which curve moved, what you did, and what you would do differently.
2. Using the data table from one game, plot inflation against real GDP growth quarter by quarter. Identify the quarters where AD shifted and where SRAS shifted.
3. Play the oil shock twice with the same seed: once fighting inflation hard, once keeping unemployment low. Compare the two outcomes and relate them to C&T’s discussion of the negative real shock dilemma.

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