to fiscal policy
Federal Reserve System
the Fed controls demand
The government has two main macroeconomic policy tools at its disposal
to keep aggregate demand growing at roughly the same rate as potential
GDP: fiscal policy, which is a fancy word for tax and spending policy,
and monetary policy, which involves the Federal Reserve and consists
of increasing or decreasing the money supply through open-market operations,
changes in the discount rate, and changes in reserve requirements.
Changes in the money supply affect interest rates, and changes in
interest rates affect investment, consumption, unemployment, inflation,
and economic growth. Through lectures, simulations and exercises,
this workshop addresses how the government tries to bring stability
to the market.
Ted Hartsoe, at Choate
Rosemary Hall, in Wallingford, Connecticut, introduces the basic concept
of fiscal policy, while Greg Smith,
at Hastings-on-Hudson High School, in New York, has his students make
posters that demonstrate the three tools of the Federal Reserve Bank.
Eliot Scher, at White
Plains High School in New York, teaches a class on the details of
the Fed's Open Market Operations.
Ted Hartsoe, uses a
stack of pennies to demonstrate to his class how money works.
In the final segments Eliot Scher
coaches a student team from White Plains High School in "The
Fed Challenge," a competition in which students role-play as
members of the Federal Reserve Open Market Committee.
"In the Monetary policy class,
I thought about the approach and I reminded myself that
it's highly complex and although I'm dealing with intelligent
students, the idea of communicating something about
monetary policy is an amazing transition for the kids
to make. The idea of how the Fed might add money or
delete money from the money supply is amazing to them.
So I try to think of the
connections that have to be made. I say to them, 'Monetary
policy is like the idea of driving a car. You need to
be able to examine your environment, you need to be
able to understand what the signals mean to you, what's
a red light, what's a green light, what's a stop sign?
Are you going too slowly? Are you going too quickly?
Is there a danger you might go through a red light?
You might have to speed up or slow down.' And so I suggest
to them the Fed has some tools that the driver of the
car has. And all of a sudden the light bulb goes off
in their heads. 'Oh, I understand that, I drive a car.'"