Real cases

Two of the ideas you practise, meeting in one real situation. Choose, see what actually happens, then reflect.

A case · you decide

The lag & The policy rate — a 17-year-old playing central bank in an economics simulation

The idea in play: a rate change reaches inflation about a year later, so judging it too early leads to overshooting.

Six months ago, Luca's bank raised rates sharply. Inflation has barely moved, and his teammates want another big hike.

The lag: rates move unemployment within the year, and inflation responds about a year later.

The policy rate is already well above neutral.

What should Luca's bank do?

Set the rate →

A case · you decide

The supply shock & The Taylor rule — a 16-year-old in the same simulation when oil prices double

The idea in play: a supply shock raises inflation and unemployment together, so the rate can only trade one problem for the other.

An oil shock hits. Inflation jumps from 2% to 6%, and unemployment rises too. The Taylor rule says to lean the rate up against the inflation.

The supply shock: both numbers move the wrong way at once.

The Taylor rule gives a starting point, and it cannot make the trade-off disappear.

What can the policy rate achieve here?

Set the rate →