STUDENT ACTIVITY ECONOMIC SIMULATION LESSON DESCRIPTION This activity

STUDENT ACTIVITY ECONOMIC SIMULATION

LESSON DESCRIPTION This activity will examine what the US economy might have been like before the establishment of the Federal Reserve (FED, or the Central Bank). You will experience a situation where there is no central monetary authority like the FED to come to the aid of the economy

LESSON OBJECTIVES 1. Identify the need for establishing the Federal Reserve. 2. Identify the relationship between price levels and the money supply in the economy. 3. Describe the importance of price stability

PROCEDURE AND DISCUSSION QUESTIONS • We will experience what an economy might be like without the Federal Reserve. • During the 19 th century, there was no central monetary authority. Currency was being issued by many banks. As more notes (paper money) were issued, currency eould begin to lose its purchasing power (the currency couldn’t buy as much). This was a difficult environment for people to live and work in. • How many of you are thinking of buying a new phone? • Are you concerned the price will rise while you are saving the money?

MORE DISCUSSION QUESTIONS • If you were not able to predict how much something would cost in the future, would you be more or less likely to save your money? • Would you be more or less likely to buy something today if you were not sure what the price would be in 3 to 6 months? • How much money is in the US economy today? • Let’s see: www. federalreserve. gov/releases/h 6

BEGIN ACTIVITY

DISCUSSION AFTER 1 ST ACTIVITY • How do we know what one piece of currency is worth? How do we know what one US dollar or 1 rmb is worth? • Would it have made a difference if you were given more money? • Are auctions a realistic way to think about the way we purchase things?

2 ND DISCUSSION RAISE YOUR HAND IF YOU HAD MORE CURRENCY IN THE 2 ND ROUND. Did you feel richer? Since prices rose you were no better off. This is what we call INFLATION, a general rise in prices Did the economy produce any more items? Does having more money make you wealthier? This is the most important role of the FED – to maintain price stability through monetary policy – controlling the money supply.

The FED • We will learn more about the FED or Central Bank later in the course.

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