Classroom Activity: How Fed Policy Transmits to the Economy

This interactive activity reinforces students’ comprehension of the linkages between monetary policy and the economy. The activity first reviews the key concepts on this topic. Students then participate in an active-learning demonstration showing how changes in monetary policy ripple through the economy to move the economy toward the Fed’s goals of maximum employment and price stability.

Objectives of this lesson:

Students will be able to

  • describe the key components of the Fed’s dual mandate;
  • describe how the Fed sets the stance of monetary policy;
  • analyze the linkages between (i) the Fed’s policy interest rate, (ii) market interest rates, (iii) the decisions of households and businesses, and (iv) the economic goals of maximum employment and price stability; and
  • analyze policy strategies given economic conditions.

Compelling Question:

How does the Fed conduct monetary policy to achieve price stability and maximum employment?


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