# Monetary Policy Simulation Classroom Exercise | VCESR

Source: https://www.vcesr.com/insights/monetary-policy-classroom-exercise

# Classroom exercise: compare two monetary policy rules

How should a central bank respond when inflation is above target and output is below potential? Calculate two initial rate decisions, then use Noscere to compare their effects over time.

VCESR · 10 November 2026

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## Calculate the initial policy rate

**For introductory or intermediate macroeconomics:** allow about 25 minutes. The first calculation needs only a calculator or spreadsheet. The optional second part uses Noscere's US Policy Rules laboratory.

Assume a neutral nominal policy rate of 3%, an inflation gap of +2 percentage points and an output gap of −1 point. Use this simple rule for the initial decision: policy rate = neutral nominal rate + inflation weight × inflation gap + output weight × output gap. Ignore rate smoothing in this first calculation.

Weights for the two classroom rules
| Rule | Inflation weight | Output weight | Initial rate |
| --- | --- | --- | --- |
| A | 0.5 | 0.5 | 3.5% |
| B | 1.0 | 0.5 | 4.5% |

Under rule A, the inflation term adds one point and the output term subtracts half a point. Under rule B the inflation term adds two points. Ask students what happens to both rates if the output gap is −3 points while the inflation gap stays the same.

## Compare the paths in Noscere

1.  Open [US Policy Rules](https://www.vcesr.com/vcesr-educator#us-policy-heading). Choose a 16-quarter horizon and the same cost-push shock for both paths. Record its size, timing and persistence before you run the comparison.
2.  Keep the output-gap response and rate smoothing fixed. Compare a reference rule with a scenario rule that responds more strongly to inflation. Record the weights the workspace actually uses; the hand calculation above uses a separate, simplified equation.
3.  Record the peak inflation reading and the lowest output gap for each path, with the quarters in which they occur. Compare them with the exact results table or exported results.
4.  Repeat with a demand shock, changing only the shock type. Discuss which changes are due to the shock and which are due to the rule.

## Debrief and limits

In the extra hand calculation, the two rates are 2.5% and 3.5%. In the simulated comparison, ask students to state which rule reduces inflation faster, how much the output path changes, and what those results depend on. Have them use the graphs and exact results before drawing a conclusion.

The hand calculation is illustrative. The optional Noscere exercise uses the app's independent US Policy Rules workspace, which draws on relationships estimated on historical US data. It is a teaching simulation of a policy mechanism. It does not forecast the current economy.

Model reference: Rudebusch and Svensson (1999), [Policy Rules for Inflation Targeting](https://www.nber.org/books-and-chapters/monetary-policy-rules/policy-rules-inflation-targeting).

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