Denise Hazlett's Classroom Experiments
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Below is a list with brief descriptions of
six non-computerized classroom experiments for undergraduate macroeconomics
courses. I received support for developing these experiments from the National
Science Foundation's Course, Curriculum and Laboratory Improvement Program under
grant DUE-9950688. Economics instructors are welcome to access a web page which
provides a detailed description of each experiment, plus the materials for running
If you fill in the form below, I will email you the url and password
Department of Economics
Walla Walla WA 99362
List of Experiments
1. Federal Funds Market Experiment.
2. Consumer Price Index Experiment
3. Unemployment Compensation Experiment.
4. Investment Coordination Experiment
5. Money as a Medium of Exchange Experiment
6. The Effects of Real vs. Nominal Interest Rates on Investment
1. Federal Funds Market Experiment.
|2. Consumer Price Index Experiment
Students develop a simplified Consumer Price Index (CPI) based on purchasing decisions made by the students in their class. They use their simplified CPI to practice calculating inflation rates and to draw conclusions about the strengths and weaknesses of an index like the CPI. Specifically, the exercise demonstrates the substitution and new product biases in the CPI. Moreover, it gives students a concrete example of how a price index like the CPI actually measures inflation. Finally, the experiment makes clear the distinction between the level of a variable (the CPI) and the rate of change in the variable (the inflation rate), two concepts students often confuse. The exercise can serve as an introduction to the topic of inflation and how we measure it. Or, it can provide the starting point for a more advanced discussion of the sources of bias in the CPI, and the measures the Bureau of Labor Statistics has recently taken to reduce these biases.
|3. Unemployment Compensation Experiment.
Students take the roles of workers and employers who use a double oral auction labor market to negotiate employment contracts. The instructor takes the role of a government that offers progressively more generous levels of unemployment compensation. The experiment produces data that students can analyze to test the general predictive power of economic theory, as well as the specific hypothesis that more generous unemployment compensation causes a higher unemployment rate and a narrower distribution of income.
|4. Investment Coordination Experiment
Students represent firms that make investment decisions. They play a repeated game in which each firm chooses its level of investment. The one-shot game has two Pareto-ranked Nash Equilibria. In the Pareto inferior equilibrium each firm invests at a low level, generating a recession. The Pareto superior equilibrium corresponds to an expansion, as each firm invests at a high level. Participating in the experiment helps students understand theories that posit coordination failure as the cause of economic fluctuations. Students see that when firms expect a recession, their resulting low levels of investment actually cause a recession. Likewise, when firms expect an expansion, their resulting high levels of investment cause an expansion.
|5. Money as a Medium of Exchange Experiment
This experiment promotes discussion of the social origins and characteristics of money. Students take the roles of traders who face a double coincidence of wants problem. As they recognize the benefits of overcoming trading frictions, students spontaneously begin using a medium of exchange. The setting comes from Duffy and Och's (1999) experimental version of the Kiyotaki-Wright (1989) search model of money. In the Kiyotaki-Wright (KW) environment, agents specialize in production, but consume a good other than their own product. This experiment demonstrates how specialization and decentralization endogenously give rise to money. Furthermore, the experiment promotes discussion of the characteristics of an item that make it a good candidate for becoming money. Here, the commodity with the lowest storage spontaneously emerges as a generally accepted medium of exchange.
|6. The Effects of Real vs. Nominal Interest Rates on Investment
Students take the roles of borrowers and lenders in a double oral auction credit market. They negotiate loans in order to fund investment projects. Students negotiate their loans in terms of nominal interest rates. However, from the follow-up data analysis, students see that their investment decisions depended on real rather than nominal interest rates.