Navigating Economic Challenges- Insights from the Econland Simulation – Rollercoaster or Stagnation

Navigating Economic Challenges- Insights from the Econland Simulation – Rollercoaster or Stagnation

Simulation Exercise

The simulation exercise tests the impact of external factors on government decisions and consumer behavior. For instance, year-2 forecasts show how the re-election of international regimes has maintained certainty. The simulation exercise also indicates that regardless of the economic policy pursued by the government, foreign factors influence the course of domestic economic growth.

Policy Interventions between Closed versus Open Economies

Monetary policy intervention in a closed economy is isomorphic to policies in an open economy with no distortions. However, an open economy is subjected to distortions resulting from terms of trade manipulation (N Gregory Mankiw, 2021). As a result, the monetary policymaker faces a different problem altogether.

A closed economy follows the central government’s guidelines, whereas an open economy follows the guidelines and principles of the global market economic system. Therefore, as the government makes key financial decisions in an open economy, it must align with what other states decide to do.

Another difference in government policy is exhibited when it comes to debt accumulation. Closed economies do not borrow, but open economies accommodate debt. That means a government in an open economic system is likely to pursue expansionary fiscal policies to spur economic growth. However, a government in a closed economy is likely to increase taxes to fill the budget deficit.

Consumer Sentiment

Consumer sentiment is an important economic indicator that guides policy decisions. The government can determine people’s confidence in the current economic state by analyzing consumers’ sentiments (McMillan, 2019). Besides, consumer sentiment gives an insight into the consumers’ overall feelings about the stability of their incomes.

Various economic players such as the government, banks, investors, and manufacturers use consumer sentiment data to make various decisions. For instance, if data indicates that consumer confidence is falling, manufacturers will reduce inventory (McMillan, 2019). Besides, such data will drive banks to cut capital and mortgage financing until normalcy resumes.

References

McMillan, B. (2019, June 27). Consumer Confidence Drops — Why Does It Matter? Forbes. https://www.forbes.com/sites/bradmcmillan/2019/06/27/consumer-confidence-drops-why-does-it-matter/?sh=7f92ab2845fd

N Gregory Mankiw. (2021). Principles of microeconomics. Cengage Learning.

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For this discussion, play your second run of the Macroeconomics Simulation: Econland (from Harvard Business Review), in which you act as a chief economic policy advisor for the fictional country of Econland.

Select either the Rollercoaster or Stagnation scenario option. You may play the simulation as many times as you like.