Practicing Policymaking with the Economic Policy Simulator

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Del curso dictado por IE Business School

Understanding economic policymaking

613 calificaciones

IE Business School

Understanding economic policymaking

613 calificaciones

This is the first of the three courses part of the Globalization, Economic Growth and Stability Specialization. This course will employ a non-technical approach to analyze how governments use policy to influence a country's economy. Upon completing the course you should be able to discuss national debts and deficits, examine fiscal and monetary policy and their appropriateness to the situation of an economy, and anticipate the results of fiscal and monetary policies and structural reform on a country. These concepts will give you the tools to develop your own position in many current economic debates, such as fiscal stimulus vs. austerity, the merits of quantitative easing, the need for higher interest rates or the future growth path of many modern economies.

De la lección

Combining Policies and Other Policy Tools

Welcome, Courserians, to our fifth module in the Understanding Economic Policy course! We have so many tools in hand now that we can spend our last sessions putting the pieces together and tackling real-world policy questions. There is little that could be more relevant, and I hope you will enjoy it. In the real world, fiscal and monetary authorities may move in the same policy directions or they may act in opposition to one another. We will explore what happens as fiscal and monetary policies interact in the real economy. Additionally, economic decision-makers have two other policies that they can use to influence the economy, which are exchange-rate policy and structural policy. We will discuss how these work, and what special complications and advantages they present. There is also a peer-evaluated assignment for this course, and it’s included in this module. You will use the Economic Policy Simulator, a free interactive exercise, to make policy for an unknown country. Use all of the tools that we have learned together, and enjoy getting a chance to run a country! Thanks for your enthusiastic participation, and enjoy these last two modules of the course!

Policy Mix in the Real World16:18

Practicing Policymaking with the Economic Policy Simulator6:36

Conclusion: Module Five1:18

Conoce a los instructores

Gayle Allard
Professor
Economics

[MUSIC]

We've been talking about the theory behind the tools.

We've talked about how they're used in real world situations, and we

want to keep talking about that next week when we start looking at.

How some of the debate has developed

over how you should fiscal and monetary policies.

But right at this stage in the course, I'd like you to

get a little bit of hands-on experience of being economic policy-makers yourselves.

So we have a simulator that you'll see in your

course material, and you can go into this simulator and.

Be the policy maker for this country and see

the results on the economy of your different policies.

And you can try all the policies you want, select

the best one, and see what gave you those good results.

So just, I'd like to take just a minute to show you how the simulator goes.

If you go to the link and then of course you click on Enter.

You go in and you will see three possible country options.

We're going to work with country one.

On your own, you are welcome to play with country two and country three.

Read the cases, work with the simulators.

Whatever results you come up with, compare them.

It would be a good learning experience.

We're going to work in this, in this Assignment with country one.

So when you click on Enter, and you go in,

the first country that's going to come up is country one.

When you click on case one on the left, you'll have a PDF

that describes the situation of that country, and I'd like you to read that.

It's not a long case, but it talks about

some of the constraints they're facing, the debt problem.

The foreign debt problem, the currency

problem, structural problems, and so, you read

through this, you should get a sense of what the country looks like.

You should definitely look for a sense of what potential GDP growth is.

Remember, that's a key bit of information.

What kind of constraints they face, what kind of things they need.

You have four policies.

You have fiscal, monetary, exchange rate, and structural.

Which policy would best suit the kind of problems that this country faces.

So once you've read the case and you've thought this

through, you can go to the page the main page

for country one and you will see on the right

hand side that there are some little cells in white.

Now, the first cell corresponds to the tax rate.

You can change the tax rate for this country, the tax rate

is currently at 36% of GDP, that's sort of the fiscal pressure, right?

You can move it up, you can move it down, you can leave it the same.

You can put it at one level in year five, another

level in year six, same in both years, whatever you want to do.

Okay.

And then you've also got, skipping down to the

third cell, you've got the growth in social spending.

This would be another fiscal policy tool.

So you've got taxes and you've got government spending.

Here it's growth, so instead of the tax where you, what you

did was you moved it up or down as a percentage GDP.

In growth of social spending you decide if you

wanted to grow next year and by how much.

If you wanted to shrink next year and by how much, at the present time you can

see growth is, growth in social spending or

social spending has been frozen so there's no growth.

Okay so you can decide to do that.

Remember when you think a fiscal policy.

That an expense in policy would involve

cutting the taxes and raising the spending.

But you're going to be also thinking about your deficit.

Now it comes down in the figures down below.

It its budget balance as a percent of GDP, all right.

So you'll be thinking about the deficit, how it affects the debt, so you

might not be free to be as expansive as you would like to be.

On the other hand, if you're restrictive, the economy's going to slow

down, and you can see it's not in a very good place.

You can see the growth rate if you look at the fourth line down at the bottom.

The growth rate is only 0.4 at present.

So probably in a recessionary gap.

So, you can use fiscal policy on this economy.

You can also use monetary policy.

You'll see the second cell is an interest rate, alright?

And you can raise it or reduce it.

You can see the current interest rate is 23.24.

That's pretty high, especially if you compare it with inflation rate, which

you see is the next to the last line at the bottom.

Remember, we want to think about real interest rates, okay.

So, we take the interest rate and subtract from an inflation

rate and we get a sense of its effect on the economy.

Here, the interest rate is 23, the inflation rate

is 14.7, so that's a very restrictive interest rate.

Do you want to cut it, do you want to leave it where it is.

Do you want to raise it to

combat inflation, that's another decision you could make.

In years five and years six and then finally below

those three white cells you've got little green button alright.

It say structure reform, now in order to make

this work we couldn't exactly say to you okay

what would you like to do if a Labor

Law, how are you going to change minimum wage laws?

What are you going to do about the bureaucracy?

Can't do that.

It's, we need something simple.

So this little green button allows you to choose whether you want

to regulate the country more, leave it the same, or deregulate it.

I know that's simple.

But anyway, it was the only way to make

this simulator work in a, in a very clear way.

So you can go to that green.

Cell and you can decide if you want to deregulate or regulate the country.

When you've done all those things you hit

the View Results button and you will see on

all of the lines the yellow area below your

policy variables, you'll see what happens to the country.

You see how much it grows.

You'll see what the inflation looks like, what the deficit looks like.

What happens to the debt?

What happens to unemployment?

Whether foreign investors are coming in.

What investment looks like.

What consumption looks like.

So all of these different variables will appear for you as a result of your policy.

You can repeat it as many times as you want, it will save your results and you

can see that there's a button you can click

on to view the results of all your attempts.

And I'd like you to think, to do this, as you

think of all the things we've learned in the last few weeks.

Try different policy mixes and see what happens to this economy.

[MUSIC]

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