1. Economics studies opportunity costs -- the principle that you have to give up something to get something. This principle applies to generally accepted goals that virtually all economies strive to achieve. What four macroeconomic performance goals are portrayed in The World Game of Economics? Which goals are conflicting in the sense that you have to give up one to achieve another? Are any of the goals complementary? Which ones?
2. If your economy is in the red zone of the depression corner, why are you losing points? That is, what is bad about an economy in a depression? Is there anything good about it? Why does your score go up as your economy moves out of the corner and toward the center even though prices and pollution are both rising? (Hint: Think in terms of marginal benefit and marginal cost). What is unique about the center square in The World Game of Economics? [Advanced Problem: Write an equation and test it to show that the center square is an optimal position in the playing field.]
3. Statistically, to be unemployed you must be able to work, out of work, and looking for work. Economists distinguish three types of unemployment -- cyclical, structural, and frictional. Which two types of unemployment are explicitly depicted in The World Game of Economics? If you are cyclically unemployed, why can't you find a job? If you are structurally unemployed, why can't you find a job? What do economists mean by full employment? Does it mean that unemployment is zero and everybody has a job? Explain your answer.
4. Why does the shopping cart shrink as your economy moves up the playing field in The World Game of Economics? What is bad about inflation? What is stagflation? Why does the government have to print higher denomination currency when a country is experiencing hyperinflation? [Advanced Question: If your country was experiencing rapid inflation and currency exchange rates were flexible and market determined, then would your country's currency depreciate or appreciate? Briefly explain.]
5. What is an externality (spillover) in economics? Explain the difference between an external diseconomy (cost) and an external economy (benefit). Give an example of each one. If an economy has significant external diseconomies, is it over-producing or under-producing the current composition of its GDP? Briefly explain. How does The World Game of Economics incorporate and illustrate the effects of external diseconomies?
6. When either Aggregate Demand (AD) or Aggregate Supply (AS) shifts, the economy moves to a new location and equilibrium. In The World Game of Economics an economy can move in eight different directions, depending on the changes is AD and AS. Think of eight different events that would move an economy in each of the eight directions. Sketch a picture of the corresponding AD-AS diagram and show which curve(s) is/are shifting. (Note: Try to think of current events that are not already in the game).
7. Do economies ever really experience fiscal policy gridlock? Can you think of any historical or recent examples? Why did it take so long during the 1930's for the United States economy to get out of the Great Depression? What happened in 1941 that caused the US government to increase its spending significantly and the economy to expand rapidly? Was that a necessary or sufficient event to get the economy out of the depression? Explain your answer. [Research Assignment: Search the web for recent reports of the Japanese economy in the 1990s. What delayed the Japanese government's response to its worst recession in decades?]
8. What does the multiplier multiply? Why does your economy sometimes move only one space when you select a policy and other times it moves as many as four spaces? What determines the strength of the multiplier? What is the crowding out hypothesis regarding fiscal policy? [Advanced Question: Sometimes your trade and monetary policies don't work in The World Game of Economics and you move 0 spaces. Explain how this could happen for a currency depreciation and expansionary monetary policy, respectively].
9. Economists debate the effect of income taxes on the economy. Some economists emphasize the demand side effects of a change in income tax rates. Others point to the supply side effects. What do the demand side economists say happens when income taxes are cut? What do the supply side economists say happens? Who's right? Could they both be right? Explain. What happens to AD and AS in The World Game of Economics when taxes are decreased (or increased)? [Research Assignment: In the early 1960s, President John F. Kennedy proposed a tax cut. What was his motivation and what were the arguments he presented to Congress to justify his policy proposal? Did Congress cut taxes at his request?]
10. Many countries around the world have formed Free Trade Areas (FTAs) or common markets. This means that they reduce tariff rates and trade restrictions within their membership zone. Why do they do this? What is the underlying principle and what are the motivating forces that encourage countries to enter into these agreements? What arguments do protectionists present to oppose free trade and support tariffs? When are countries most likely to implement an increase in tariffs, trade restrictions, or a deliberate currency depreciation in The World Game of Economics? What effects do tariffs have on Aggregate Supply and Aggregate Demand? [Research Assignment: Identify as many FTAs in the world as you can and list the member countries in each one. Is it possible for a country to be a member in more than one FTA?]
11. Since the world abandoned the gold exchange standard (which was a fixed exchange rate system) in the 1970s, currency exchange rates have been primarily determined by free market forces. However, central banks do occasionally intervene by leaning against the wind to deliberately depreciate (or appreciate) their country's currency. This is called dirty floating or a managed float. How does a central bank depreciate its country's currency in foreign exchange markets? Why would it want to do this? Who benefits from a currency depreciation? [Advanced Assignment: Illustrate the supply and demand effects of a currency depreciation in the foreign exchange market for a specific country's currency. On another diagram, show how the currency depreciation is affecting the country's AD-AS equilibrium.]
12. Monetary policy is the control of a nation's money supply, interest rates, credit, and bank regulations. It is a flexible policy, because it is generally insulated from politics, especially when the central bank is independent of the government. However, it is notorious for having unpredictable effects and time lags under different circumstances. This is why your monetary policy doesn't take effect until your next turn in The World Game of Economics. Open market operations are the buying (or selling) of government securities, and they are the primary tool of the central bank's monetary policy. When the central bank buys government securities, the money supply increases and the economy expands. Explain how this works step-by-step, beginning with the central bank's purchase and ending with the economy's Aggregate Demand [AD] curve shifting upward and to the right. Explain how the policy affects commercial bank liquidity, the bond market and interest rates, the plans and decisions of households and businesses to spend, and the multiplier effect of their new spending. How long could all of these linkages take in real time? [Advanced Question: Under what economic conditions would the effects of a given monetary policy take longer? Would an economy tend to react faster to an expansionary or contractionary monetary policy? Explain your answer.]
13. Research Assignment: In the 1970s the world's economies were entrenched in stagflation. This was due primarily to the oil embargo and shortage, but there were other causes as well. How did the Federal Reserve System in the United States respond to this crisis? What policy dilemma did it face when it considered its demand-side policy tools? What were the basic tenets of the Deregulation and Monetary Control Act (1980)? How did the other central banks in the industrialized countries deal with the stagflation problem?
14. Research Assignment: Surf the world-wide web to obtain economics data for a specific country (e.g., Japan) over the past five (or ten) years. Get data on annual changes in real GDP, unemployment, inflation, (and pollution, if you can). Write a report which traces the country's macroeconomic performance and policy over that period. Critically evaluate the government's policies or failure to react to economic circumstances. What did they do right, in your opinion? What did they do wrong? Discuss to what degree you think the government had control over the economy, and vice-versa. Print a copy of the main board of from The World Game of Economics and illustrate the economy's approximate movements on a year by year basis. (Indicate the units of measurement for each key variable on the outer edges of the playing field).
15. Advanced Question: The World Game of Economics assumes that all countries face similar trade-offs between inflation and unemployment in the short run and that they all have the same natural rate of unemployment. Is that realistic? Why or why not? The game also assumes that industrialized countries and less developed countries are equally capable of stabilizing their economies with fiscal, trade, and monetary policies. Is that realistic? Why or why not?
16. Advanced Question: What is the nature of the debate between neo-classical and mainstream (Keynesian) economists regarding the proclivity of market economies to deviate from and return automatically to full employment? What do you think? Would business cycles in market economies be less volitile and severe if the government adopted a passive fiscal policy stance and increased the money supply at a steady rate consistent with the long term real growth trend? What is the empirical evidence to support this proposition? Why are discretionary fiscal and monetary policies so difficult to implement in a timely manner? Has laissez faire ever really been tested? If so, when and where?
17. Advanced Question: Identify and define each of the following terms. Discuss the extent to which these concepts are either explicitly or implicitly incorporated in The World Game of Economics: (a) real vs. nominal GDP; (b) cost-push inflation; (c) Phillips curve; (d) Okun's law; (e) NAIRU; (f) Schumpeterian competition; (g) tragedy of the commons; (h) Pigou's wealth effect; (i) marginal propensity to consume; (j) supply-side economics; (k) Laffer curve; (l) beggar-thy-neighbor trade strategy; (m) competitive currency devaluations; (n) static welfare effects of a tariff; (o) quantity theory of money; (p) Pareto optimality.
The World Game of Economics (C) 1999 Ronald W. Schuelke All Rights Reserved