Objective: The purpose of this project is to (1) apply core macroeconomic concepts by making fiscal and monetary decisions, and (2) analyze the consequences of those decisions on a country’s economy.
Task: You will play as simulation game called Econland. In this game, you will be managing the economy of Econland, which is a medium-sized country, for seven rounds or years. Each round, you have to make economic decisions about interest rate, income tax rate, corporate tax rate and government spending. After each round, you will receive an approval rating from the population of Econland. The objective is to make the population happy and to maximize the approval rating. The population cares about GDP growth, unemployment rate, inflation rate and budget surplus.
You will be presented with three scenarios: 1) base case with medium economic growth and volatility, 2) rollercoaster with high economic growth and volatility and 3) stagnation with low economic growth and volatility. You will play each scenario twice.
How to approach the Common Assessment
Dr. Shereen Bacheer
ECN-202: Understanding Macroeconomics
Monetary and fiscal policy decisions have important
consequences on a country’s economy.
Learning
outcomes:
Policy decisions involve trade-offs. Decisions that may
benefit one area may worsen performance in another one.
Economic policy decisions need to adapt to the changing
state of the economy of the country itself, as well as to
global economic conditions.
Economic models can be useful tools to understand the
impact of policy decisions on economic outcomes.
However, no economic model is perfectly accurate or 100%
complete.
Before playing the
Game, students need
to know about:
1- Macroeconomic indicators
2- AD-AS framework
3- Monetary Policy
4- Fiscal Policy
This Assignment/Project includes
two main tasks:
Group
Task:
• Play the game for 7 years and
report the average approval
rate (10%)
Individual
Task:
• Reflect on the game you have
played with your team. Write a
reflection report and submit it
on the blackboard (90%)
Your group Task:
You are responsible for managing the economy of Econland, a mediumsized country, for a period of seven years.
You must make monetary and fiscal policy decisions that make Econland’s
population happy—raising real GDP growth, keeping unemployment rate
and budget deficit as low as possible, keeping Inflation low but remain
positive (deflation is destabilizing to an economy).
Along the way, you will be tasked with analyzing economic growth
forecasts and will receive yearly updates from your policy advisors.
Your yearly decisions:
Interest rate
Income tax rate
Corporate tax rate
Government spending
How you will be measured
(Result Areas):
GDP growth
Unemployment rate
Inflation rate
Budget surplus (or deficit)
Your goal:
You will receive approval
points from your citizens
each year (0-100 points).
Your goal is to finish year
seven with the highest
possible approval rating.
Your individual Task:
Written Reflection Report:
Your reflection should describe what did you discover about how the model
worked every year. You need to show your understanding of relationships in
the model between; Input / Decision, Intermediary variable, Result Area(s).
Additionally, you need to describe and explain the impact/result.
you need to explain how you played the game as a group, how did you take the
decision for the first year and why did you change the decision the year after
and after and after.
you need to use the results tables for the Seven years when you write your
reflection on how did that change happen from one year to another? what did
you do wrong? and what did you do right? and how did you learn from your
mistakes?
How to start …
1. The leader of your group will receive a link which allows you access to
the game
2. Very important: Sign up using your Zayed University email ID, (only the
group leader)
3. The first practice run will be the Base Case scenario; then there will be
two more runs of the Base Case scenario, then two runs of the
Rollercoaster scenario, and the final two runs will be the Stagnation
scenario.
4. Each run of a simulation will be co-ordinated by the Team Leader.
Please do not attempt the game individually. Discuss synchronously
with your group members.
10
3 scenarios; 7 games …
(This includes one practice game)
The Common Assessment
The Common Assessment
APA referencing style is essential
The Common Assessment
Critical thinking
• ‘Critical thinking is
thinking about your
thinking while you’re
thinking, in order to make
your thinking better.’
Richard Paul (1992), in Critical Thinking: What Every
Person Needs to Survive in a Rapidly Changing World, p. 7.
Guidelines for the game itself
• You need to add a screenshot of the team’s best score in the appendix of your report, together with a list of the
names of students in your team.
• Write notes during the games, documenting what decisions you made and what results you got. This will help you
make better decisions during the game, and it will also help you when you come to write the assignment.
• Be prepared to make lots of mistakes … this is normal, especially early in the game. Remember: you either get it
right, or you learn. Do not feel downhearted if you get a bad score! The important thing is to try and figure out
what went wrong.
• Remember: Not doing anything is also an option. A ‘neutral policy stance’ or ‘non-activist approach’ is not
uncommon.
• Note well: There might be some colleagues in your team who seem to understand what is going on. Ask them to
explain. Also, there might be someone in your team who is very quiet. Ask them if they are ok, and whether they
need to go through a decision again. Be a team player.
Handy hints for the assignment
• There is no single correct answer
• Evidence of critical thinking will be rewarded … “this is what I used to think, now I think this, and in the future, I will think
this way instead” … this is critical reflection … you are documenting your learning ✅
• To get an ‘A’ grade, you really need to include diagrams to illustrate your analysis, and this will necessarily involve AD-AS
diagrams 📈
• Your prospect of getting top marks would be heightened if you analyze what happens in the simulation game, and manage
to refer to real-world events that provide examples of what you are referring to … this would be the icing on the cake 🎂
• All sources have to be clearly referenced (data and information)
• Most importantly, be authentic, be yourself … do not ‘outsource’ this to someone who claims they know what to do! It is
impossible to do this assignment without playing the simulation game with your classmates.
Some suggestions regarding teamwork …
1. Let your team leader lead … This does not mean you sit back
and relax … different team members might have different
responsibilities. The team leader will co-ordinate activities
2. Make lots of notes … this helps with the analysis of results (and
later when you complete your Common Assessment)
3. Take your time … read, think, discuss, arrive at a consensus,
make your decisions, analyse the results of your decisions
Your individual Task:
Written Reflection Format:
Write a 6-9 pages reflection: Times new Roman 14, 1.15-line spaces,
normal margins.
Add a cover page with individual names and IDs, Group Name, and a
brief introduction about ECONLAND game
Individual reflections will be checked for plagiarism.
Submit your report individually on the BB “Course Common Assessment”,
via SafeAssign
Due date for submission is April 17th 2024, however, it is advisable to
submit it earlier to have more time for exam preparation
• You can find some resources on the BB.
Help Resources
• Tips to Optimize Computer Performance
During a Simulation
• Restart your computer. Computers that
have not been restarted in a long time
can run slowly.
• ONE browser + ONE tab. Simulations
work best with only one browser and
one tab open.
• Close all other programs and browsers.
Running fewer programs allows your
computer to devote more speed to the
simulation.
• Turn off other wireless devices.
Multiple devices simultaneously trying
to access the wireless connection at the
same time can weaken the network
strength.
Student Guide
Econland Teaching Note, Version 1 July 2017
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Table of Contents
1.
Introduction ………………………………………………………………………………………………………….. 3
2.
Target Audience and Learning Objectives ………………………………………………………………….. 3
3.
How to Play …………………………………………………………………………………………………………… 4
4.
Overview of Screens ……………………………………………………………………………………………….. 7
5.
Macroeconomics Learning Section …………………………………………………………………………. 10
6.
Technical Requirements ………………………………………………………………………………………… 12
APPENDIX: Glossary ……………………………………………………………………………………………………… 13
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1. Introduction
Econland is a learning platform and simulation game designed to teach students about
Macroeconomics in an engaging way. When playing Econland, students learn about how the
economy works by understanding the economic environment, making economic policy
decisions and analyzing the results of economic policy decisions. In addition to the
simulation game, the Econland platform contains a range of resources that provide support
for learners.
This Teaching Notes contains the key information for required to use the Econland
simulation game and accompanying learning platform.
2. Target Audience and Learning Objectives
The target audience of Econland includes anyone with an interest or need to learn
Macroeconomics. Users of Econland include College or University students taking an
Introduction to Economics or Economics Principles course, High School students preparing
for AP tests, A-Levels, International Baccalaureate or other exams, or professionals needing
to learn key economic concepts and the consequences of economic policy decisions. The
use of Econland can be adapted by the instructor to fit the level of each group of learners.
Econland is designed to support the most commonly used Introductory Macroeconomics
course curricula throughout the world. Macroeconomics courses typically cover economic
concepts such as Gross Domestic Product, Unemployment, Inflation, Budget Deficits,
Productivity, Aggregate Demand & Aggregate Supply and Monetary & Fiscal Policy. When
students reach the topics of Aggregate Demand & Aggregate Supply and Monetary & Fiscal
Policy, it is often a challenge for instructors to deliver this theory in an engaging way.
The simulation game brings economic policymaking to life for students by letting them
understand the economic environment of their country, make monetary and fiscal policy
decisions, and analyze the consequences of their decision making. At the same time, using
Econland consolidates student understanding of underlying economic concepts taught at
earlier stages of an Economics course (including GDP, Unemployment, Inflation, Budget
Deficit). Please refer to the Glossary for a full list of the concepts covered in the game.
At a deeper level, Econland develops critical thinking and problems solving skills. It offers
the opportunity to learn about modeling and system dynamics.
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3. How to Play
In EconLand, students manage the economy of a medium sized country. For a period of
seven rounds (= years), players make economic policy decisions (Monetary and Fiscal Policy)
for their country in order to make the population happy about the economy. The four
decisions that students make during each round of the simulation game are:
• Interest Rate
• Income Tax Rate
• Corporate Tax Rate
• Government Spending
The population of Econland cares about their incomes, employment prospects and cost of
living. In addition, the government must keep its budget deficit under control. These factors
are measured by the following four results areas:
• GDP growth
• The Unemployment Rate
• The Inflation Rate
• Budget Surplus (or Deficit)
At the start of the game, players choose one of the three scenarios for the volatility of the
external economic environment: Base case (average volatility), Rollercoaster (high volatility)
or Stagnation (low volatility). Each Scenario has a somewhat different text describing the
external economic environment. Initially, students should choose the Base Case scenario.
After they have played the game at least once, they can choose one of the other scenarios,
which introduce variety and a greater level of challenge to the simulation.
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After choosing a scenario, for each of the seven years of the game, players go through the
three steps shown in the picture below.
Each year, players receive information on the economic conditions facing the country. These
are summarized in the World Economic Growth Forecast and the Consumer Confidence
Index. After studying the economic conditions and outlook, players make four economic
policy decisions. Then players analyze their results, key economic data, followed by the
World Economic Growth Forecast for the next year and the Consumer Confidence Index
level, before making new policy decisions. The game lasts seven years.
The aim of the game is to obtain the approval of the citizens by maximizing Real GDP
Growth, while keeping the Unemployment Rate and the Budget Deficit as low as possible.
Inflation also needs to be low, but should remain positive. Negative Inflation (Deflation) is
destabilizing for an economy.
Every round, 0, 10 or 25 ‘approval points’ are given for each of the four results areas. The
approval points are given according to the table below.
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Taken together, the approval points for each Round make up the overall approval rating (0 100 points), which represents the proportion of the country’s population that approves of
the chosen economic policies. The overall objective of the game is to end up with the
highest possible Average Approval Rating at the end of Year 7.
The Dashboard page provides a summary of the results obtained and gives feedback on the
player’s decisions and results. Players need to take these feedback comments into account
before making decisions for the next Round.
The Reports page provides important insights into the functioning of the economy, including
data on the components of GDP, productivity and the exchange rate. Analyzing the data in
the Reports section is key to making well informed decisions in future Rounds.
When the game is finished, the View Previous Runs page shows the game result ranked
against any other previous games played.
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4. Overview of Screens
There are five main pages in Econland. Players can navigate from one page to another at
any time by clicking the navigation buttons on top of the screen.
1. Game Info: The Game Info page explains the objectives and rules of the game.
2. Decisions: Players review the economic outlook for the next year. The outlook consists
of a description of global economic conditions, a World Economic Growth Forecast and
the Consumer Confidence Index. It is summarized in a ‘weather forecast’ picture which
ranges from sunny, partly cloudy, cloudy to rainy. After reviewing their previous year’s
results and the economic conditions and outlook, students make four Monetary and
Fiscal Policy decisions (Interest Rate, Income Tax Rate, Corporate Tax Rate, Government
Expenditure).
Students can see how each of their decisions affects different variables in the simulation
model by reading the tooltips that are visible when hovering the cursor over a decision area,
as shown below.
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3. Dashboard: Shows results along the four results areas (GDP Growth, Unemployment,
Inflation, Budget Deficit) as well as written feedback provided by the Policy Advisor
based on the player’s decisions and results. The smileys for each results area show
whether the player obtained 0, 10 or 25 points for the year. The graph shows the
approval rating for each year of the game and the average approval rating for the
duration of the game is shown as a number.
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4. Reports: The Reports section includes three tables (see next page):
–
Table 1: Real GDP and its components. A breakdown of GDP into its components
(Consumption, Government Expenditure, Investment, Imports and Exports). The
total level of GDP is provided in both Nominal and Real terms.
Table 2: Other Macroeconomic data. Contains data on intermediary variables that
help students understand the results they obtain. (see Model section for further
explanation).
Table 3: Economic environment, Decisions and Results. Includes data on the world
economic growth forecast, decisions taken by the player and results obtained for all
the round played.
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5. Macroeconomics: The Macroeconomics tab contains access to a range of learning
materials and tools. These are described in Section 5 below.
5. Macroeconomics Learning Section
The Macroeconomics section contains several educational resources that support students
in learning about the Macroeconomic concepts practiced in the simulation game and
beyond. The Macroeconomics section is divided into three sections.
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1. Overview
The Overview page contains a brief description of the Macroeconomic theory practiced in
the simulation game. It contains an outline of Monetary and Fiscal Policy, the Aggregate
Demand and Aggregate Supply model, as well as the objectives of economic policy in the
game (GDP growth, Unemployment, Inflation, Budget Deficit).
2. Glossary
The Glossary page includes an explanation of all the economic terms and concepts used in
Econland. The terms are explained in such a way that they are relevant for both the purpose
of playing the Econland simulation game and for a Macroeconomics course. The Glossary
section in Econland is provided in the Appendix.
3. Resources
The Resources section consists of four types of resources that support students in the
learning of Macroeconomics:
1. Videos: Contains direct links to instructional videos about the Macroeconomics
topics covered in Econland.
2. Econland News: A newsletter that brings the real world into the study of Economics
with the week’s most interesting Economics news stories. Each article illustrates
current applications of topics covered in Economics courses of all levels. Econland
Newsppears every Friday and is sent to subscribers automatically and free of charge.
3. Forum: A moderated discussion forum where students can ask questions and find
answers on everything related to the study of Economics.
4. Quiz: A test bank of Multiple Choice Questions on Macroeconomics that practice the
concepts used in Econland. Questions are at a level typically found in Introductory
Macroeconomics courses at College/University level. Each time the student takes the
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test, ten questions are taken at random from the test bank. After completing the
test, students get their score and a brief explanation of the answer to each question.
6. Technical Requirements
Econland functions on personal computers (Windows and Mac OS) as well as tablets and
smartphones. Econland works on all common browsers.
Beginning players are advised to start on a computer or tablet in order to have full view of
the functionalities on offer. People with some experience of Econland will be able to use the
Econland on smartphones.
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APPENDIX: Glossary
The Glossary (available in Econland under the Macroeconomics tab) explains the key concepts used
in the simulation game in a way that is relevant to both the game and a standard Macroeconomics
course.
Budget Surplus (Deficit): The difference between government revenues (as collected through
income taxes and corporate taxes) and government expenditure. The Budget Surplus or Deficit is
usually expressed as a percentage of GDP.
Consumer Confidence Index: A measure of how optimistic consumers feel about the state of the
economy. An index score of 100 indicates consumers are feeling neutral about the economy. The
higher the score, the more optimistic they are.
Consumer Price Index: A measure of the cost of a typical basket of goods bought by a consumer.
The index is set at a value of 100 in the base year and is recalculated each year based on the existing
prices for the same basket of goods.
Corporate Tax Rate: The percentage of profits that firms need to pay as tax to the government.
Deflation: Deflation occurs when the inflation rate is negative and the average price level in an
economy is falling. Deflation can encourage consumers to postpone their consumption in
anticipation of lower prices and can lead to a severe recession.
Exchange Rate Index: The value of the country’s currency against a basket of other currencies, with
the Index set at a value of 100 in the base year. If the value of this Index increases, the value of the
country’s currency has gone up (appreciated). Conversely, if the value of the index decreases, the
value of the country’s currency has decreased (depreciated).
Fiscal Policy: Fiscal Policy includes the government’s decisions with respect to Government
Expenditure and Taxation. In Econland, the government decides on the total level of Government
Expenditure, the Income Tax Rate and the Corporate Tax Rate.
Government Spending Multiplier: When the government increases its expenditure, the people or
businesses who receive the additional expenditure will spend a part of this additional income which
in turn increases the income of other actors in the economy, and so on. Therefore, GDP increases by
more than the original increase in expenditure. This is referred to as the multiplier effect. How big
the multiplier is remains open to debate. Generally, economists agree that the multiplier effect is
larger when there is excess capacity in an economy (e.g. unemployment). Without excess capacity,
increased government expenditure may just be ‘crowding out’ private investment.
Gross Domestic Product (GDP): The market value of all goods and services produced within a
country in a given period of time. The components of GDP are Consumption + Investment +
Government Expenditure + Net Exports. Net Exports consists of Exports – Imports.
Income Tax Multiplier: The Income tax multiplier works in a similar way as the government spending
multiplier, except that it results from changes in the level of income tax rather than in government
expenditure. Reductions in income tax can lead to increases in consumer expenditure that are
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greater than just the additional disposable income as a result of the tax cut. This is because
consumers will spend most of the additional income on goods and services. The recipients of this
expenditure will in turn spend most of it, leading to a multiplier effect that is similar to the
government expenditure multiplier.
Income Tax Rate: The percentage of their earned income that citizens of a country need to pay as
tax to the government. Income Tax is separate from Sales Tax (also called Value Added Tax), which is
a tax on consumption. Sales Tax is not included as an element in the Econland game.
Inflation: The percentage change in price level from one year to the next, as measured by the
change in the Consumer Price Index
Interest Rate: In the Econland simulation game, the interest rate refers to the discount rate set by
the Central Bank. It is the only instrument of Monetary Policy available in the game. Low interest
rates stimulate investment, consumption and exports (through a depreciation of the exchange rate),
but they can lead to inflation if the economy is close to operating at full employment.
International Monetary Fund (IMF): The IMF is a multilateral organization with its stated objectives
being “to foster global monetary cooperation, secure financial stability, facilitate international trade,
promote high employment and sustainable economic growth, and reduce poverty around the
world.” The IMF’s activities include providing economic policy advice to governments and producing
economic analyses and forecasts for every member country.
Monetary Policy: Monetary Policy refers to the actions taken to manage the Money Supply.
Monetary Policy is the responsibility of a country’s Central Bank (called the Federal Reserve in the
United States). In the real world, Monetary Policy decisions can include setting the Interest Rate
(Discount Rate), buying or selling Government Bonds by conducting Open Market Operations and
setting the Reserve Ratio requirement for commercial banks. For simplicity, in Econland the only
Monetary Policy decision to make is the level of the Interest Rate.
Productivity: The quantity of goods and services produced for each unit of labor input. Productivity
is the main determinant of standards of living in a country. In the game, productivity can be
increased through investment in the country’s capital stock, which in turn is promoted through low
interest rates and low corporate tax rates.
Real GDP: The GDP of a country after taking into account the effects of Inflation. Real GDP is usually
measured as the GDP at constant prices, where the price level is fixed at the level of a certain base
year.
Unemployment rate: The percentage of the labor force that is not employed and is actively looking
for work. The labor force consists of all people who are either working or who are actively looking
for work.
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MACROECONOMICS
SIMULATION: ECONLAND
Student Name and ID
ECN-202 | Spring 2023
[Type here]
Table of Contents
Introduction: …………………………………………………………………………………………………………. 2
The Analysis of Year 1: ……………………………………………………………………………………………. 3
…………………………………………………………………………………………………………………………… 3
The Analysis of Year 2: ……………………………………………………………………………………………. 4
The Analysis of Year 3: ……………………………………………………………………………………………. 5
The Analysis of Year 4: ……………………………………………………………………………………………. 6
The Analysis of Year 5: ……………………………………………………………………………………………. 7
…………………………………………………………………………………………………………………………… 8
The Analysis of Year 6: ……………………………………………………………………………………………. 8
The Analysis of Year 7: ……………………………………………………………………………………………. 9
Conclusion:…………………………………………………………………………………………………………. 10
References ………………………………………………………………………………………………………….. 11
Appendix …………………………………………………………………………………………………………….. 12
All 6 Runs Summary……………………………………………………………………………………………………. 12
Appendix 1: stagnation (second trial) …………………………………………………………………………….. 12
1
Introduction:
Our group’s objective for this project is to apply core macroeconomic concepts by making fiscal
and monetary decisions and analyzing the consequences of those decisions on Econland’s
economy. We were given the task to play a simulation game called Econland where we will be
managing the economy of a medium-sized country for seven rounds or years.
In each round, we must make economic decisions about interest rate, income tax rate, corporate
tax rate, and government spending. After each round, we will receive an approval rating from the
population of Econland. Our goal is to make the population happy and to maximize the approval
rating by considering GDP growth, unemployment rate, inflation rate, and budget surplus.
We were presented with three scenarios: 1) base case with medium economic growth and
volatility, 2) rollercoaster with high economic growth and volatility, and 3) stagnation with low
economic growth and volatility. We will play each scenario twice.
Our achievement of the greatest approval rate, 90 points, will be the main topic of this report.
The scenario of stagnation second trial, which refers to a situation when output is decreasing and
both economic growth and volatility are at low levels, is the chosen scenario to write about in
this report.
2
The Analysis of Year 1:
For the first year, our goal was to maintain the economic growth and wanted our population to be
satisfied. In the first year, our team has collectively decided to implement certain changes. As
shown in figure 1, We have decided to decrease the interest rate by 0.5% from the original rate of
3% to a new rate of 2.5%. The income tax will remain constant at 24%. Additionally, we have
reduced the corporate tax by 2% from the original rate of 30% to a new rate of 28%.
Furthermore, we have increased government expenditure by 1 billion, resulting in a new
expenditure of 31 billion instead of the previous 30 billion. During the first year, we received the
highest possible average approval rating of 100 points, as shown in Figure 2. However, in the
first year, the actual Gross Domestic Product (GDP) was 2.9%, which is a considerable growth
rate and indicates that the economy is progressing in the right direction. This led to a reduction in
the unemployment rate, and the consumer confidence remained stable at a value of 100.
However, we experienced low inflation at a rate of 2.5%, which is concerning and largely due to
the increase in government expenditure and a budget deficit of -2.6% as shown in (Appendix1).
We received feedback from a policy advisor who affirmed that the economy is performing well
in all aspects, and the population is content with the policies’ results. The advisor added that the
economy is expanding at a healthy pace and urged us to identify the policy decisions that have
led to this level of economic growth.
To address the policy advisor’s question, we were able to achieve our economic goals by
implementing certain strategies. Firstly, we recognized that to stabilize the economy of a
medium-sized country, we needed to make adjustments to the interest rate. By lowering the
interest rate, we incentivized people to borrow money for significant purchases such as homes
and cars, thereby increasing the amount of money in the economy. Secondly, we reduced
corporate tax, to increases company incentives for investment, and production which will
eventually lead to higher wages and greater opportunities for employment (Auerbach, 2010).
This aligns with Keynesian economics, which suggests that increased government spending can
boost aggregate demand and consumption, leading to higher production and faster recovery from
recessions (Greenlaw, 2017). However, we anticipated a rise in inflation due to more jobs and
higher wages, which increased household incomes and consumer spending, leading to higher
demand and higher prices for goods and services across multiple sectors, resulting in
inflation.So, for our second year goal we will work on stabilizing the economy and try as much
as possible to lower the inflation rate.
Figure 2: Fiscal and Monetary Decisions
Figure 1: Year 1 Results
3
The Analysis of Year 2:
In the second year, we chose an expansionary fiscal strategy, holding all other parameters
constant but raising government spending to 32 billion and lowering the business tax to 26%
(Figure 3). We picked this strategy because we knew that tools of expansionary fiscal policy,
such as raising government spending, lowering taxes, or boosting transfers from the government,
could enhance aggregate demand, which would then increase
output, employment, and price level. Our goal was to keep the
average approval rating at 100 while also stabilizing the
economy (Figure 4). Our decision to expand had a favorable
effect on GDP growth and decreased the unemployment rate.
However, the rate of inflation kept increasing to be 2.6%.
According to Greenlaw et al. (2017), Expansionary fiscal
policy involves increasing government spending, lowering
taxes, or both, with the aim of stimulating economic growth
and increasing aggregate demand. However, this policy can
lead to inflation and this what happened to us because when
there is an increase in demand for goods and services, but the
supply remains constant, prices tend to rise. With more money
in circulation, people have more purchasing power, which
leads to an increase in demand for goods and services, and if the supply of goods and services
cannot keep up with this increased demand, the prices of those goods and services will go up.
Theref ore, if the expansionary fiscal policy is not accompanied by measures to increase the
supply of goods and services, it can lead to inflation.
The results show a large increase in the real GDP, which reached 106.2 based on the second-year
statistics (see Appendix 1). The budget deficit increased negatively to 2.1%, while the inflation
rate remained high at 2.7% (see Appendix 1). To battle inflation, it was decided to boost interest
rates and increase government spending in year 3.
Figure 4: Fiscal and Monetary Decisions
Figure 3: Year 2 Results
4
The Analysis of Year 3:
In year 3, our goal was to control inflation, so we decided to make a mix between two policy
which is expansionary fiscal policy by increasing the government expenditure (G) by 1 billion.
and contractionary monetary policy by increasing interest rate by 0.5%. While combining
contractionary monetary policy with expansionary fiscal policy can sometimes have negative
effects on the economy, there are additionally some benefits. Contractionary monetary policy can
shift aggregate demand to the left and slow economic growth while also assisting in the control
of inflation. The negative effects of contractionary monetary policy on growth in the economy
can be reduced nevertheless if expansionary fiscal policy is adopted simultaneously. This may
result in a better balance between encouraging growth in the economy and managing inflation
(Kloosterman et al., 2022). We boosted government spending to $33 billion while increasing the
interest rate to 3%, leaving all other variables unchanged (Figure 5) to encourage the country’s
economy. Both fiscal and monetary policy can have various effects on an economy, depending
on how they are implemented and in what economic conditions they are applied.
•
One of the theories we used to implement our goal is using the
Monetary policy. The activities performed by a central bank or other
monetary authority to control the amount of money, and interest rates
in a country’s economy are referred to as monetary policy (Greenlaw,
2017). A range of tools are used by central banks to carry out monetary
policy. Here are a few of the main instruments of monetary policy
(Greenlaw, 2017).:
• Purchasing or selling government assets on the open market is
referred to as “open market operations” or (OMO) and it is done to
affect interest rates and the supply of money.
• Reserve Requirements (RR): Central banks have the authority to
impose reserve requirements which limit the amount of money that banks can lend out.
The interest rate that central banks charge banks for short-term borrowing is known as the
“discount rate” or (DR).
Overall, the entire demand for goods and services in an economy, known as aggregate
demand, can be significantly influenced by monetary policy. The availability and cost of
credit, as well as consumer and company spending, can be influenced by the monetary
policy that central banks utilize a variety of tools to achieve. Contractionary monetary
policy slows aggregate demand and manages inflation, whereas expansionary monetary
policy encourages aggregate demand and accelerates economic growth (Greenlaw, 2017).
We have once again obtained the highest average approval rating of 100 percent as a result. The
graph shows that our economy has a high real GDP of 109.0 and a low unemployment rate of
4.7% right now. Even if it has marginally decreased to 2.6%, the inflation rate is still regarded as
5
modest. The economy is doing well overall, and our consumers are happy with the outcomes of
our work. Our efforts to control inflation have been achieved, and lowered by 0.1% from last
year’s to become 2.6% .
Figure 6: Fiscal and Monetary Decisions
Figure 5: Year 3 Results
The Analysis of Year 4:
In year four , Our objective was to maintain the economy and also our Average approval rate.
Maintaining a healthy economy requires a mix of policies and actions that support long-term
economic growth and stability (Greenlaw, 2017). and to achieve this, we pondered over the
options of using expansionary fiscal policy, where Government can promote economic growth
by increasing its expenditure and lower it taxes so we shift the aggregate demand to the right.
Similarly, we also decided to use expansionary monetary policy so we can control inflation and
stabilize the economy by lowering the interest rate.
However, we took a dangerous decision of rising income
tax, because Raising income tax can help stabilize the
economy by providing the government with additional
revenue (income tax, 2004). After careful consideration, we
reduced interest rates to 2.5%, decreased corporate tax rates
from 26% to 25%, and increased income tax rates to 25%,
as illustrated in Figure 7. Therefore, we took the necessary
steps by increasing our government expenditure by 1
billion, bringing it up to 34 billion. We made our choice
based on our comprehension of the sum of all the
information we had, either from the monetary policy or the
fiscal policy.
According to research by Greenlaw et al. (2017), changes in tax laws can influence investment
spending. A reduction in income taxes typically results in a rise in consumption spending (C) and
Investment (I), and therefore shifts aggregate demand to the right, whereas an increase in income
taxes typically results in a decline, a shift to the left. However, our strategy involved increasing
the government expenditure and at the same time increasing income tax rates while concurrently
lowering corporate taxes to act as a motivator and encourage investment spending, which would
then increase GDP.
6
Consequently, the average acceptance rating stayed constant even though it maintained a high
score of 100 points (Figure 8). The policy advisor had earlier stated that the government was
running a budget surplus, providing an opportunity to boost government spending or decrease
taxes to support economic growth. However, this outcome underlines the error of the decision.
Our investigation showed a problem with the Budget Surplus (Deficit) as% of GDP, which fell
from -1.5% to 0%, causing the consumer confidence index to fall from 101.4 to 100.6 in a
commensurate manner (Appendix 1.) Additionally, the recession in the world economy caused
the unemployment rate to increase to 5%, which had a detrimental effect on Econland this year.
On the other hand, the inflation rate rose to 3%, which was not welcomed (Figure 8). However, it
is critical that we choose wisely in the upcoming year.
Figure 7: Fiscal and Monetary Decisions
Figure 8: Year 4 Results
The Analysis of Year 5:
As indicated in Figure 9, in year 5, to achieve our goal which is solving the problem of excessive
inflation and manage the budget deficit. we decided to raise the interest rate to 3%, because
Increasing interest rates can lower inflation (Greenlaw, 2017). In addition, we made certain tax
modifications to offset the effect, including a reduction in income tax to give consumers more
purchasing power and increase consumption (C). We also reduced corporate tax from 25% to
23% to promote new investment (I) and boost capital stock.
After year 5, the average approval rating dropped to 94 points (as shown in Figure 10), proving
that we were successful in managing the budget surplus (deficit) to zero instead of 1.5 points and
bringing inflation down to 2%. We were shocked to learn that the Unemployment rate had
increased to 5.1%. Additionally, as stated in Appendix 1, real GDP growth has reduced to 2.2%,
which is not good for the economy. However, because we took contractionary measures, we
expected this, but we urgently needed to fix inflation and the budget deficit, otherwise we would
have lost all our previous efforts. We kept government spending constant in nominal terms on
the recommendation of our policy advisers, but we were also reminded that positive inflation
causes a decrease in government spending in real terms (i.e., after accounting for inflation). We
carefully considered his suggestion, and in year 6 we made the decision to follow it.
7
Figure 9: Fiscal and Monetary Decisions
Figure 10: Year 5 Results
The Analysis of Year 6:
In the 6th year,Our goal was to rise real GDP growth and lower unemployment rate. A decision
was made to adjust all variables simultaneously. Following the advice of a policy advisor,
government expenditure was increased by 1 billion to reach 35 billion which led to a decision to
adjust other variables in order to maintain a flourishing economy. To achieve this, the interest
rate was lowered to 2% and the corporate tax was decreased to 22% to shift aggregate demand to
the right and boost GDP. Finally, income tax was increased to generate revenue for the
government to carry out its duties (Figure 11) .
After implementing our policies, the average approval rating increased to 95 points (as shown in
Figure 12). Our objective was to improve the economy by reducing the unemployment rate and
increasing real GDP growth. We were successful in achieving these goals, but the growth in real
GDP and reduction in unemployment rate were marginal, reaching 2.9% and 4.9% respectively.
The economy also witnessed a budget surplus of 1.3% and a low inflation rate of 2.3% (see
Appendix 1). As a result, we received positive feedback from the population, indicating their
satisfaction with our policies.
Our economy is now thriving, with the budget surplus and growth in real GDP being notable
achievements. Our policy advisor suggested that we could either reduce taxes or increase
government spending to further boost economic growth. This was our final goal for the year 7
decision.
Figure 11: Fiscal and Monetary Decisions
8
Figure 12: Year 6 Results
The Analysis of Year 7:
In the seventh year, we have made a mistake by adjustments to our decision from the previous
year by reducing government spending to 34 billion rather than rising it. We believed that the
continual increase in spending was contributing to high inflation and budget deficits. Our hope
was that this reduction in spending would have a positive impact on the economy,and in reality it
was the opposite, as shown in Figure 13. To encourage investment and keep unemployment low,
we also lowered the corporate tax rate to 21% while increasing income tax to generate revenue
and offset the decrease in government spending. We understood that this decision would also
affect the unemployment rate, but we believed that we had addressed this issue by changing the
corporate tax.
Based on the results from year 7, the average approval rating decreased to 90 points, as seen in
Figure 14. The appendix 1 data indicates that real GDP growth fell to 0.9%, the unemployment
rate rose to 5.5%, and inflation increased to 2.5%, which is the lowest level in the last seven
years. Additionally, the budget surplus increased to 3.7%.This mistake made me learn to read
once and twice and not to rush or forget the advice given by the Police Advisor. Because this
mistake made us lose the people’s trust and made the economy fall. The economy was predicted
to contract as a result of our unnecessary contractionary cut in G .If I were in that situation again,
I would consider increasing government expenditure by more than 34 billion since the data
shows a budget surplus.
Figure 13: Fiscal and Monetary Decisions
Figure 14: Year 7 Results
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Conclusion:
In conclusion, playing the game was a fascinating and instructive experience that enabled me to
apply what I had learned to actual circumstances and observe the effects of my choices. The
stagnation second trail scenario during the six trials gave us the greatest approval rating, 90
percent. However, beginning in year 5, we encountered difficulties identifying the proper amount
of adjustment. This experience showed me how difficult it is to maintain the economy
functioning properly because unforeseen occurrences happen every year and the economy could
be growing steadily yet suddenly shift. Additionally, trade-offs are always present, such as time,
and opportunity cost. The most significant lesson was that the government uses many significant
policies and variables and use them in ways that could benefit the nation and the people who live
there.
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References
Ahmad, M. F. (2020). the Effect of Inflation and Interest Rate on Msme Turnover in
Makassar City. J.Ekon, 9(02), 40-44.
Auerbach, A. J. (2010). A modern corporate tax (p. 2010). Center for American Progress.
Income tax. (2004). In P. Cornelison, & T. Yanak, The great American history fact-finder (2nd
ed.). Houghton Mifflin. Credo Reference:
http://zulib.idm.oclc.org/login?url=https://search.credoreference.com/content/entry/hmgahff/i
ncome_tax/0?institutionId=8633
Greenlaw, S. A., Shapiro, D., Richardson, C., Sonenshine, R., Keenan, D., MacDonald, D., … &
Moledina, A. (2017). Principles of Micro-economics 2e. for AP® Courses. Rice University.
Kloosterman, R., Bonam, D., & van der Veer, K. (2022). The effects of monetary policy across
fiscal regimes.
Monetary policy. (2015). In T. Riggs (Ed.), The Gale encyclopedia of U.S. economic
history (2nd ed.). Gale. Credo Reference:
http://zulib.idm.oclc.org/login?url=https://search.credoreference.com/content/entry/galegue/m
onetary_policy/0?institutionId=8633
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Appendix
All 6 Runs Summary
Appendix 1: stagnation (second trial)
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