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Implementing Fiscal and Monetary Policy to Resolve an

Economic Crisis

v1.2

The President’s

Dilemma

Interact

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Product Code: INT265

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ISBN# 978-1-56004-642-4

About the Buck Institute for Education

The Buck Institute for Education (BIE) is dedicated to

improving 21st-century teaching and learning by creating and

disseminating products, practices, and knowledge for effective

Project Based Learning. Founded in 1987, BIE is a not-for-profit

501(c)3 organization that receives operational funding from the

Leonard and Beryl Buck Trust, and funding from other education

organizations, foundations, schools and school districts, state

educational agencies, and national governments for product

development, professional development, and research.

Project Based Economics

Authors

Nan Maxwell, PhD

John Larmer

John Mergendoller, PhD

Yolanda Bellisimo

BIE Production Editor

Suzie Boss

Interact Production Editor

Justin Coffey

From 'The President's Dilemma'. Product code INT265.

Interact. (800) 359-0961. http://www.teachinteract.com/

Contents

Table of Contents

Foreword ..................................................1

Introduction

.............................................3

Chapter One .............................................. 3

Teaching Economics With Project Based Learning

. . . . . 8

Chapter Two

.............................................. 8

Teaching Strategies for Project Based Economics

.......10

Chapter Three:

Sample lesson—Make More Money?

. . . . . . . . . . . . . . 16

Letter From AJ

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Guidelines for Conducting the

Interview and Playing the Role of “AJ”

. . . . . . . . . . . . . 23

Median Earnings for

Full-time, Year-Round Workers

. . . . . . . . . . . . . . . . . . . . . 24

Chapter Four:

The President’s Dilemma .....................25

Purpose and Overview .................................25

Daily Directions......................................28

Teaching The President’s Dilemma . . . . . . . . . . . . . . . . . . . . . 28

Step-by-Step Teaching Guide

..........................30

Teacher Materials....................................47

Economics Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Monetary Policy

........................................47

Fiscal Policy

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

From 'The President's Dilemma'. Product code INT265.

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Contents

Table of Contents

Concept Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Assessment Tools

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

Questions From Panel Members

.......................55

Rubrics

.................................................58

Test for The President’s Dilemma Answer Key

. . . . . . . . . . 62

Student Materials....................................67

Memo From the President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

National Statistics For Selected Years

..................68

Letters From Constituent Groups

......................69

Memo From the Chief of Staff

. . . . . . . . . . . . . . . . . . . . . . . . . 72

Test for The President’s Dilemma

. . . . . . . . . . . . . . . . . . . . . . . 73

Teacher Feedback Form..........................78

Release Form for

Photographic Images ............................79

From 'The President's Dilemma'. Product code INT265.

Interact. (800) 359-0961. http://www.teachinteract.com/

Purpose and Overview

The President’s Dilemma

Chapter Four

Purpose and Overview

Time required

10–12 class periods

Project scenario

In a mixed-market economy like the United States, the federal government

uses fiscal and monetary policy tools to influence the behavior of individuals,

firms, and financial institutions. However, in attempting to improve the

performance of the nation’s economy, the government encounters the

problem of resource scarcity. Tradeoffs must be considered; some groups

may be harmed in order to help another group in society. To explore these

concepts and gain some understanding of macroeconomic analysis, students

are presented with the following problem-solving scenario in this project:

Due to a rapid rise in oil prices, the United States is facing a severe economic

crisis with high levels of inflation, high unemployment, and slow economic

growth. The President, whose approval ratings are plummeting, has asked

a Special Task Force of the Council of Economic Advisors to recommend

a policy to deal with the crisis without increasing the national debt. The

Task Force is asked to make an oral presentation with visual aides to a

panel composed of representatives of constituencies that have a targeted

interest in the economic solution proposed. As students learn about leading

economic indicators and fiscal and monetary policy, letters arrive from

three panel members. Each constituent argues for policies that benefit

their interest group—unemployed middle-class workers, retired people,

and business representatives. Students must consider both supply-side and

demand-side options and weigh the costs and benefits of various solutions

as they recommend policies that balance the needs of the nation.

Concepts to be learned

To successfully resolve the problem and complete the products required in

this project, students need to understand and be able to apply the following

economic concepts:

10–12 class periods

From 'The President's Dilemma'. Product code INT265.

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Purpose and Overview

Budget deficit•

Consumer price index•

Contractionary policy•

Cost-push inflation•

Demand•

Demand-side theories•

Discount rate•

Crowding out•

Economic indicators•

Expansionary policy•

Federal reserve system•

Fiscal policy•

Government spending•

Gross Domestic Product (GDP)•

Inflation•

Interest rates•

Monetary policy•

Multiplier•

National debt•

Open market operations•

Opportunity cost•

Reserve requirement•

Scarcity•

Supply•

Supply-side theories•

Tax•

Tradeoffs•

Unemployment rate•

From 'The President's Dilemma'. Product code INT265.

Interact. (800) 359-0961. http://www.teachinteract.com/

Purpose and Overview

NCEE content standards addressed

The President’s Dilemma addresses the following Voluntary National Content

Standards in Economics codified by The National Council on Economic

Education, in partnership with the National Association of Economic

Educators and the Foundation for Teaching Economics. For more information

see www.ncee.net/ea/standards.

Standard # Economic Concept

1 Scarcity

2 Opportunity cost

12 Interest rates

15 Investment

18 Gross Domestic Product

19 Unemployment and inflation

20 Fiscal and monetary policy

From 'The President's Dilemma'. Product code INT265.

Interact. (800) 359-0961. http://www.teachinteract.com/

Teacher Materials

Concept Definitions

The curriculum is designed to teach the following concepts:

Budget deficit: A situation where the flow of expenditures exceeds the

flow of income for the federal government. A deficit occurs when taxes

on income and expenditures are insufficient to meet the payments for

goods and services and interest on the national debt. Contrast with

national debt.

Consumer Price Index (CPI): A measure of the average price of a fixed

“market basket” of consumer goods and services that are commonly

bought by households. This statistic is computed monthly by the Bureau

of Labor Statistics.

Contractionary policy: A decrease in aggregate demand or supply that is

brought about by a decrease in government spending, an increase in

taxes, or a combination of the two (fiscal policy) or a decrease in money

supply (monetary policy). Contractionary policies are used when the

economy is overheating.

Cost-push inflation arises with sustained increases in the cost of production

that cause the price of the product to increase

“Crowding out”: When the federal government borrows money, the

associated rise in interest rates decreases planned investment spending

by private firms and individuals. As a result, government expenditures are

said to “crowd out” those by private firms.

Demand: Purchases of a good or service that people are actually able and

willing to make, given prices and choices available to them. The “law of

demand” states that there is a negative (or inverse) relationship between

price and quantity demanded. That is, as price increases (decreases) the

amount of a good purchased decreases (increases). Consumers’ demand

is determined by their tastes, income, and price of other goods. The

demand schedule is a table showing the quantities of a good that will

be purchased at various prices. The demand curve is a curve that relates

the price of a product and the quantity of the product that individuals are

able and willing to purchase. Aggregate demand is the total demand

for goods and services in the economy by households (for consumer

goods), by firms and government (for investment goods), and by other

countries (exports).

Demand-push inflation arises when aggregate demand exceeds aggregate

supply and consumers bid up prices

From 'The President's Dilemma'. Product code INT265.

Interact. (800) 359-0961. http://www.teachinteract.com/

Teacher Materials

Concept Definitions

Demand-side theories: Views that emphasize increasing aggregate demand

as a means of maintaining economic stability in the economy. Should

the economy be at the downturn of the business cycle, demand-side

theorists believe that aggregate demand should be stimulated through

expansionary policies. Should the economy be overheating, demand-side

theorists believe that aggregate demand should be slowed through

contractionary policies.

Discount rate: The rate of interest at which the Federal Reserve lends to the

banking system. Short-term interest rates are geared to the discount rate

through the banking system. If the capital market thinks that changes in

the rate are likely to last for some time, long-term rates will also change.

Economic indicators: Statistics about the economy that allow analysis of

current economic performance and predictions of future performance

Expansionary policy: An increase in aggregate demand or supply brought

about by an increase in government spending, a decrease in taxes, or

a combination of the two (fiscal policy) or an increase in money supply

(monetary policy). Expansionary policies are used when the economy

needs to be stimulated.

Federal Reserve System: The central banking system in the United States.

The system consists of 12 regional banks and branches under control

of the Federal Reserve Board. Although the Governors of the Board are

appointed by the President of the United States, the financial capital of

the reserve banks is owned by the member banks, making the “Fed” an

independent agency. The Board effectively acts as a central bank and

approves the discount rate and reserve ratio, and generally regulates the

operation of the banking system. The Federal Open Market Committee, a

subcommittee of the Board, effectively has the power to influence money

supply through open market operations.

Fiscal policy: An attempt to attain certain economic goals, such as achieving

full employment and increasing Gross Domestic Product (GDP), by

varying the government’s purchases of goods and services and its rate of

taxation. The spending authorization and rates of taxation are established

by Congress.

Government spending: Payments for goods, services, and interest made by

the government. Fiscal policy includes the amount spent for goods and

services by the federal government. The multiplier effect associated with

government spending results from spending by any level of government.

Gross Domestic Product (GDP): The dollar value of all final goods and

services produced by resources located in the country during a year

From 'The President's Dilemma'. Product code INT265.

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Teacher Materials

Concept Definitions

Inflation: An upward movement in the average level of prices. The result

is diminished purchasing power of a given sum of money. Inflation

is contrasted with deflation, which is a downward movement in the

average level of prices. Demand-push inflation arises when aggregate

demand exceeds aggregate supply and consumers bid up prices. Cost-

push inflation arises with sustained increases in the cost of production

that cause the price of the product to increase.

Interest rates: The price of loanable funds, which is usually expressed as

annual percentage and measures the yearly cost of borrowing. The price

paid per dollar borrowed per period of time. Nominal interest rates: The

interest rate taken at its face value (that is, the interest rate expressed

in current dollars and not adjusted for inflation). Real interest rates:

The actual return to capital. Because comparing nominal interest rates

includes a purely monetary component, the value of the rate must be

purged of changes in prices to be compared over time. The rate obtained

after eliminating the element of price change is the real interest rate.

Monetary policy: An attempt to attain certain economic goals, such as

lowering the rate of unemployment or inflation. This can be done by

varying the money supply, interest, and (in some cases) conditions

of credit. The Board of Governors of the Federal Reserve establishes

the policies.

Multiplier: The recipients of income will save a portion and spend a portion

of it. Of the portion spent, the income generated to the next recipient will

be partially saved and partially spent. The result of this continued pattern

is that the total increase in aggregate income will, in the end, be several

times larger than the increase in the initial income received (that is, it will

be some multiple of the increase in initial income). The expression that

gives the value of this multiple is the multiplier.

National debt: The total amount of money owed by the federal government

to the owners of government securities. It is equal to the sum of the past

budget deficits (less budget surpluses). Contrast with budget deficit.

Open market operations: The buying and selling of federal government

securities by the Federal Reserve banks

Opportunity costs: The real sacrifice involved in achieving something. The

value of the next best opportunity that is foregone in order to achieve a

particular thing.

Reserve requirements: The proportion of deposits that a bank or other

depository institution is legally required to hold in cash reserve. The

proportion is set by the Federal Reserve as a monetary policy tool.

From 'The President's Dilemma'. Product code INT265.

Interact. (800) 359-0961. http://www.teachinteract.com/

Teacher Materials

Concept Definitions

Scarcity: A condition where less of something exists than people would like

if the good had no cost. Scarcity arises because resources are limited and

cannot accommodate all of our unlimited wants.

Supply: The amount of a good or service that firms are prepared to sell

at a given price. The firm determines how much of a good to supply

using its marginal cost curve. Industry supply is the summation of all

individual firms’ marginal cost curves (in a constant cost industry). The

supply schedule is a table showing the amount of a product that will

be produced at a given price. The supply curve relates the quantity of

a good supplied by a firm (or market) and each price. The law of supply

dictates that the curve is upsloping, indicating that more will be produced

as the price of the good increases. Aggregate supply is the total amount

of goods and services available for consumption and consists of both

domestically produced goods and services and imports.

Supply-side theories: Views that emphasize increasing aggregate supply

as a means of maintaining economic stability. Should the economy be

at the downturn of the business cycle, supply-side theorists believe that

aggregate supply should be stimulated through expansionary policies.

Should the economy be overheating, supply-side theorists believe that

aggregate supply should be slowed through contractionary policies.

Tax: A compulsory transfer of money from individuals, institutions, or groups

to the government. The tax may be based on either wealth or income or

as a surcharge to prices. Taxation is one of the key elements in fiscal policy

and a primary means by which a government finances its expenditures.

Tradeoff: An exchange relationship denoting how much of one good (or

resource) is needed to get another good (or resource).

Unemployment rate: The number of people able and willing to work

expressed as a percentage of the labor force. Labor force includes

working individuals and unemployed individuals but does not include

individuals who do not wish to work (e.g., retirees).

From 'The President's Dilemma'. Product code INT265.

Interact. (800) 359-0961. http://www.teachinteract.com/

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