Becoming Ben Bernanke

Aug 8, 2010 • 232 Views

This was fun! A 5 minute Federal Reserve simulation lets you target the fed funds rate for 16 hypothetical quarters and then watch the inflation and unemployment impact. It all appears manageable until a surprise news headline appears.

The site also links to a decade by decade look at monetary policy through a video summary of key events and graphs of the CPI, real GDP, the fed funds rate, and unemployment. Very well done.

Knowing that current unemployment is at 9.5% and inflation is close to 1% for a 12 month period, during the simulation you can experiment with your own policy ideas.

The Economic Lesson

Described by British economist A.W.H. Phillips, a Phillips Curve depicts an inverse relationship between unemployment and inflation. While the original Phillips curve referred to wage inflation, it soon came to represent the connection between unemployment and price inflation. Soon also, economists such as Milton Friedman and Edmund Phelps challenged the validity of the original curve as did 1970s stagflation.

Typical monetary policy response to accelerating inflation is to target higher interest rates; diminishing unemployment would require lower interest rates. It all sounds rather logical until you look at what can really happen. 

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