MACROECONOMICS

SIMULATION: ECONLAND
ECN-202-004 | FALL 2022

Student Name:

ID:

Group Members:

MAY 11, 2022

INSTRUCTURE NAME: SHEREEN BACHEER
CRN: 23231
MAY 11, 2022

Table of Contents
Table of Contents...............................................................................................................1
Introduction:......................................................................................................................2
The Analysis of Year 1:.......................................................................................................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
The Analysis of Year 6:.......................................................................................................8
The Analysis of Year 7:.......................................................................................................8
Conclusion:......................................................................................................................10
References:......................................................................................................................11
Appendix.........................................................................................................................12
Appendix 1: Base case (First trial)...............................................................................................12
Appendix 2: Base case (Second trial)..........................................................................................13
Appendix 3: Rollercoaster (First trial).........................................................................................14
Appendix 4: Rollercoaster (Second trial)....................................................................................15
Appendix 5: Stagnation (First trial).............................................................................................16
Appendix 6: Stagnation (Second trial)........................................................................................17

1
Macroeconomics Simulation: Econland
MAY 11, 2022

Introduction:
The report will examine and analyze the microeconomic policy decisions that we made as a
group as the government of Econland. The report's objective is to demonstrate our
understanding of the relationship between macroeconomic policies and their effects on our
citizens. The projects have two main parts: First, every team needs to play a game for 7 years
and try to get the highest average approval rate. Second, each one of us needs to reflect on her
experience. The report contains a full assessment of the main fiscal and monetary policy
decisions taken during the seven-year administration, as well as an explanation of the
underlying causes for those decisions and the policies' associated consequences.

The game consists of 3 scenarios, and each of them contains seven years, and we have played
each scenario twice. Our goal in each scenario is to get the highest approval rating. And to
maintain a high rate, we need to keep in mind that real GDP growth must be higher than
2.5%, unemployment rate less than 5%, inflation rate less than 3%, and budget deficit less
than 3%. In this report, I will discuss the highest approval rate that we achieved, which was
81 points. My chosen scenario is stagnation, which indicates that output is decreasing and
economic growth and volatility are low.

2
Macroeconomics Simulation: Econland
MAY 11, 2022

The Analysis of Year 1:

As a first-year, we have decided as a team to keep everything constant to see the change in
the economy. As shown in figure 1, the interest rate is 3%, the income tax rate is 24%, the
corporate tax rate is 30%, and the government expenditure is $30 billion. In year 1, we got a
high average approval rating of 70 points (Figure 2). However, the real GDP for the first year
is 2.5%, which is considered on average and shows that economic growth is slow. As a result,
the unemployment rate rose, and consumer confidence fell. On the other side, we achieved a
low inflation rate of 2% and a 3% budget deficit (Appendix 6). We have received feedback
from a policy advisor who suggests that we should investigate a component that can enhance
real GDP growth. As we studied, some changes are required to boost real GDP and lower the
unemployment rate. We came up with one solution: lower interest rates, which will enhance
real GDP for the second year.

Figure 1: Fiscal and Monetary Decisions Figure 2: Year 1 Results

The Analysis of Year 2:

In the second year, we have decided to take monetary policy decision, lowering the interest
rate to 2.5% and keeping all other factors constant. We made this decision based on our

3
Macroeconomics Simulation: Econland
MAY 11, 2022

understanding of Keynes' theory of liquidity preference, which states that the interest rate
adjusts to bring money supply and demand into balance, assuming the money supply is fixed
by the central bank. As a result, falling prices diminish money demand (MD), shifting the
MD to the left and lowering the interest rate (r). A fall in interest rate increases investments
and the number of goods and services demanded.

According to Pettinger (2019), economic growth is

defined as an increase in real GDP, and aggregate
demand (AD) is a factor that causes short-term
economic growth. The aggregate demand consists of
consumer spending (C), investments (I), government
spending (G), and net exports (NX). According to
figure 1, which shows an increase in aggregate
demand shift the curve in to the right, where low-
interest rates can lower borrowing costs,
encouraging consumers to spend and businesses to invest, so increasing in consumer
spending and investments lead to increase the real GDP (Y).

As a result, the average approval rating jumped to 78 points, which is considered a high score
(Figure 3). According to year 2, the results show that the real GDP increased by a small
amount and reached 101 (Appendix 6). According to appendix 6, consumption increased
from 55 in year 0 to 59.1 in year 1, and there was a 0.2 increase in investments. This resulted
in an increase in real GDP. Furthermore, the inflation rate remained unchanged at 2%, and
the budget deficit decreased to 2.1%, which is also favorable for the economy (Appendix 6).
However, the unemployment rate has increased to 5.6%, and we must find a solution to this
problem. So, we decided to increase the government expenditure in year 3 to increase the real
GDP and decrease the unemployment rate.

Figure 4: Fiscal and Monetary Decisions Figure 3: Year 2 Results

The Analysis of Year 3:

In year 3, we decided to make an expansionary fiscal policy by increasing the government
expenditure (G) by 1 billion. In order to stimulate the economy, we increased government
spending to $31 billion while keeping all other factors constant (Figure 5). We took this

4
Macroeconomics Simulation: Econland
MAY 11, 2022

decision because we knew that making a fiscal policy has two effects on aggregate demand,
the multiplier effect and the crowding-out effect. So, increasing government expenditure will
increase income and thereby increase consumer spending. This will boost the real GDP and
then decrease the unemployment rate.

Pettinger identified the multiplier effect as an initial

injection into the economy that results in a higher
gain in national income. For example, if the
government spends more money on one company,
wages will rise, causing the company to hire more
workers and increase its output. In addition, these
workers will increase their spending leading to an
extra increase in the real GDP. According to the
graph, the first increase in aggregate demand
increases output to Y2. The secondary effect, on the other hand, results in an increase in AD
(AD3) and a rise in real GDP (Y3). The injections can include investments, government
expenditure, and exports (2019).

As a result, we received the highest average approval rating of 85 points in all seven years.
As shown in the graph, we have a high real GDP of 106.8 and a low unemployment rate of
4.7%, but the inflation rate climbed slightly to 1.9%, which is still considered low. And the
budget deficit becomes lower with -0.5% of GDP. Right now, the economy is performing
well on all fronts, and customers are satisfied with the outcomes of our work. Because of the
multiplier effect, as we raised expenditure to grow real GDP by investing in the economy,
investments climbed to 16.6, and consumption increased to 68, boosting real GDP higher
than the second year.

Figure 5: Fiscal and Monetary Decisions Figure 6: Year 3 Results

The Analysis of Year 4:

In year 4, we were confused about two decisions: we needed to increase investments, and
therefore we considered lowering corporate taxes or lowering interest rates. However, we
ultimately chose to reduce the corporate tax rate to 28% while keeping all other variables
constant (Figure 7). We reached our decision based on our understanding of fiscal policy and
aggregate demand, as we learned that there are two methods to implement the expansionary

5
Macroeconomics Simulation: Econland
MAY 11, 2022

fiscal policy: one is to boost government spending directly, and the other is to reduce taxes
indirectly. Tax reductions may encourage investors to increase their investments, causing the
AD to move to the right, thus increasing real GDP.

According to Greenlaw et al. (2017), Both

consumption and investment spending are affected
by tax policy. Income tax cuts tend to enhance
consumption spending, while the rise in the tax
tends to decrease consumption. Tax policy also
can boost investment demand by reducing the
corporate tax rate or providing tax incentives for
specific types of investments. In order to do that,
the shift in consumption spending (C) and investment spending (I) will affect the entire AD
curve. Based on figure 3, both graphs show a shift in the aggregate demand curve (AD). In
figure (a), the curve shifts to the right, and the new equilibrium has greater production and
price than the initial equilibrium. This shift could be caused by an increase in government
expenditure or a reduction in taxes, resulting in greater consumption and, in turn, an increase
in real GDP. While figure (b) indicates an AD shift to the left, the new equilibrium will have
lower productivity and price levels than the initial equilibrium. This shift could be caused by
a reduction in government spending or an increase in taxes, resulting in lower consumer
spending and, as a result, lower real GDP.

The average approval rating fell to 81 points which are considered a good score. However, it
emphasizes that the decision was incorrect because we found a problem with real GDP,
which fell from 2.6% to 1.1%. Furthermore, due to the worldwide economic slowdown, the
unemployment rate has risen to 5.5%, which adversely affected Econland this year. On the
other hand, the inflation rate has increased to 2.9%, and the government is operating in a
surplus. The results are considered favorable because we need to keep the inflation rate and
the budget surplus below 3%, which we have achieved (Appendix 6).

According to feedback from the policy advisor, the economic growth is slow, and we have a
surplus, which means we can raise government spending or lower taxes to encourage
economic growth.

6
Macroeconomics Simulation: Econland
 MAY 11, 2022

Figure 7: Fiscal and Monetary Decisions Figure 8: Year 4 Results

The Analysis of Year 5:

In year 5, We chose to lower the interest rate to 2% to encourage investors to invest and thus
boost real GDP growth (Figure 9). As we studied the interest rate effect, a lower interest rate
leads to more investment spending, which is one of the components of aggregate demand,
hence real GDP will rise (Y). Because real GDP is expected to increase, we expected
unemployment to fall and inflation to rise.

As a result, the average approval rating increased to 82 points in year 5 (Figure 10). And our
goal has been achieved, since the real GDP growth increased to 2.8%. However, the
unemployment rate is still high at 5.4%, and it decreased by a small amount. Furthermore, the
unexpected event is the decrease in the inflation rate to 2.2%, which is good for the economy.
And the government is performing in surplus with 1.5% of GDP (Appendix 6). Based on the
feedback from policy advisors, the economy is growing at a good pace, but the government is
running a budget surplus. So, we can adjust the decision by either increasing government
expenditure or reducing taxes in order to boost economic growth and reduce the
unemployment rate.

Figure 9: Fiscal and Monetary Decisions Figure 10: Year 5 Results

The Analysis of Year 6:

In year 6, we were confused between two decisions: further lowering the interest rate or
expanding government spending. However, the final decision was to decrease the interest rate
to 1.5%, and the other factors remained the same (Figure 11). Our goal is to boost real GDP
growth in order to lower the unemployment rate. We knew that decreasing interest rates
would grow the economy by stimulating investment, which in order would help people find
work.

7
Macroeconomics Simulation: Econland
MAY 11, 2022

As a result, the average approval rating decreased to 80 points (Figure 12). Our goal was to
lower the unemployment rate, which we did, but only by a small percentage, which reached
5%. Furthermore, the economy increased its budget surplus to 2.7% and the inflation rate to
2.8%, which is still low (Appendix 6). However, we faced an unexpected issue where
economic growth slowed due to the budget surplus. Here we make a mistake that leads to
having more budget surplus, so if I was in that situation again, I will increase the government
expenditure to boost the real GDP and reduce the unemployment rate. Additionally, the
economy is running a budget surplus, and I knew that most governments are running the
government with a low deficit.

Figure 11: Fiscal and Monetary Decisions Figure 12: Year 6 Results

The Analysis of Year 7:

In year 7, to adjust the wrong decision that we have taken in year six, we decided to increase
the government expenditure to 32 billion, which we expect to have a good impact on the
economy (Figure 13). As discussed previously, increasing government spending will raise
real GDP, reduce the budget surplus, and lower the unemployment rate. Furthermore, we
expected this adjustment to increase inflation since whenever the economy develops, so does
inflation.

According to the year 7 results, the average approval rating improved to 81 points (Figure
14). Based on appendix 6, real GDP growth grew to 3%, the unemployment rate remained

8
Macroeconomics Simulation: Econland
MAY 11, 2022

unchanged, and inflation increased to 3.5%, the highest level in the last seven years.
Furthermore, the budget surplus climbed to 3.3%. If I were in that situation again, I would
increase the government expenditure by more than 32 billion since the graph shows a budget
surplus, which is unusual. I could also raise the interest rate somewhat to reduce inflation.

Figure 13: Fiscal and Monetary Decisions Figure 14: Year 7 Results

Conclusion:
To sum up, playing the game was an enjoyable time that allowed me to implement my
learnings in real and see the consequence of my decisions. Our highest approval rating within
the 6 trials is 81 points, which was in the stagnation scenario. However, we faced some
difficulties in determining how much we should adjust. What I have learned from this
experience is that it's hard to keep everything in the economy running smoothly because
something unexpected happens every year. Besides, there are always tradeoffs, and the
government can never enhance all indicators at once, so they try to compromise.
Furthermore, this game shows how difficult to have the ability to make decisions since it is a
big responsibility to make your citizens happy and reach a 100% approval rating. The most
9
Macroeconomics Simulation: Econland
MAY 11, 2022

lesson learned was that the government uses fiscal and monetary policies to mitigate the
unfavorable consequences and turn the economy to its natural rate.

References:

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.

Pettinger, T. (2021, October 19). The multiplier effect. Economics Help.

Pettinger, T. (2019, November 28). Causes of economic growth. Economics Help.

10
Macroeconomics Simulation: Econland
MAY 11, 2022

Appendix

Appendix 1: Base case (First trial)

11
Macroeconomics Simulation: Econland
MAY 11, 2022

Appendix 2: Base case (Second trial)

12
Macroeconomics Simulation: Econland
MAY 11, 2022

Appendix 3: Rollercoaster (First trial)

13
Macroeconomics Simulation: Econland
MAY 11, 2022

Appendix 4: Rollercoaster (Second trial)

14
Macroeconomics Simulation: Econland
MAY 11, 2022

Appendix 5: Stagnation (First trial)

15
Macroeconomics Simulation: Econland
MAY 11, 2022

Appendix 6: Stagnation (Second trial)

16
Macroeconomics Simulation: Econland
MAY 11, 2022

17
Macroeconomics Simulation: Econland