Keynesian Economics Bized Essay

Contact: Mark Sutcliffe and John Sloman
University of the West of England
Published January 2002

The Virtual Economy

The Virtual Economy is a sophisticated on-line Web-based model of the UK economy with extensive supporting materials. It was developed jointly by the Institute for Fiscal Studies and the Biz/ed group at the University of Bristol (with the support of a grant from the Nuffield Foundation). An off-line version is available but it does not include the model itself.

The model is based on Number 11 Downing Street (the home of the UK Chancellor of the Exchequer). The virtual building is split into five floors and the navigation allows the user to jump from floor to floor. Each floor contains a number of virtual rooms, each containing various resources. The home page lists the contents of each floor as follows:

  • Ground floor - Chancellor's office with an introduction to the Virtual Economy and an information bureau with teachers' guides, student guides and details of the model.
  • 1st floor - Case Studies - this floor has case studies about the impact of changes in the economy on people, business and governments.
  • 2nd floor - Economic Policy - a whole floor dedicated to the different economic variables in the model. Here you'll find advice, explanations, worksheets and relevant economic theories about everything in the Virtual Economy.
  • 3rd floor - Library - you can browse here for all sorts of help. There are details on famous economists, all types of economic theory and a full glossary of all terms in the Virtual Economy.
  • 4th floor - The Model - on this floor is the model itself. Try changing anything you like and see the effect on the economy.

More details of the contents of each floor are given in the Appendix to this paper.

The main part of the package is the model itself. This has been developed by the Institute of Fiscal Studies and is similar to that used by the UK Treasury to prepare the annual Budget and by the Bank of England to model the effects of interest rate changes. Students can see the impact of changing various macroeconomic instruments on a range of macroeconomic and microeconomic variables. They can also see the impact on various types of family.

Instructors' and students' guides are given on 'the ground floor' and these suggest various ways in which the package can be used.

Integrating The Virtual Economy into an Economics Course

The package could be used to encourage students to investigate various topics and models. This could involve them experimenting with the model and seeing the impact of macroeconomic policy on various target groups. For example, they could be set a particular objective and see how best this could be met. Different groups could be assigned different objectives. One controversial one would be to ask students to devise a policy to maximise unemployment and poverty. This could then provide the basis for lively class debate.

The package contains various printable worksheets. All worksheets are designed for use with the model, so that students have to use the model to experiment and see if the theory being examined in the worksheet works in practice. The worksheets and details of the various theories covered in them are given on the 'second floor'.

The Teachers' Guide ( also gives the following uses.

'The materials could be used for self-paced study. Students could gradually work through sections researching relevant theories, doing worksheets and experimenting with different policies on the model. Lecturers may want to use the model for classroom experimentation. If there is an Internet connection, then it would be possible to use the model as a basis for discussion with classes. Students could suggest policies and try to predict the outcome of them. The policies can then be tried on the model to see how good their predictions were. Students could do this individually or in groups as well. Different groups could be set different targets, and they could see how easily they can meet them. This also should help to provide a basis for discussion.'

Using The Virtual Economy for assessment: an example from the University of the West of England

The Virtual Economy was used as the basis for an assignment given to 900 first-year undergraduates at the University of the West of England. These students are studying for a three-year honours degree in Business Studies. They take six modules per year, and Economic Principles is compulsory as one of the six in the first year. The Virtual Economy assignment counts for 40 per cent of the students' marks (the other 60 per cent being from an exam (50%) and a test (10%)).

The students first explore the package and the model on their own. They are told that the information on the first four floors will help them in playing being Chancellor. When they have read and explored, they select one of the businesses on which the model will impact. There are five from which to choose. They are found in the case studies section on floor 1 (

Students then select two of four policy approaches that the Chancellor could adopt (deflationary, reflationary, supply-side or redistributive). These are also found on floor 1 (

Students then move to the model and input changes consistent with the first policy approach (as directed by the selected policy approach). A summary of the results then appear, which can be transferred to a spreadsheet and printed out. The procedure is then repeated for the second policy approach.

The students then have to write a report, reviewing the impacts of their policy changes on their chosen business. They are asked to consider the following questions in their report.

  • What impact are the policy changes likely to have on the level of demand for the company's product? Why?
  • What impact are the policy changes likely to have on the company's costs? Why?
  • What impact are the policy changes likely to have on the company's profitability? Why?
  • What impact are the policy changes likely to have on other aspects of the company's financial situation? Why? (In this area you might like to consider: the level of liquidity, the level of inventories, the level of bad debts, any income on investment, interest payments, etc.)
  • What strategies could the firm adopt to counter the effects of the policies?
  • Should they change their marketing strategy? If so, which aspects: their pricing strategy, their advertising, the nature of the product itself ?
  • What policies should they lobby the government to carry out?

The report is evaluated by the tutor according to the following:

  • Structure (25%)
  • Argument (25%)
  • Originality (10%)
  • Style (10%)
  • Presentation (20%)
  • Sources (5%)
  • Spelling, grammar, etc. (5%)

A workshop is organized before the students embark on the assignment. This gives students an opportunity to have a go with the model and ask their tutor any questions.

Evaluating the experience: the tutor's perspective

The tutor experience needs to be split between (a) setting-up and running the assignment, and (b) marking it.

Setting-up and running the Virtual Economy assignment

To ensure the assignment runs smoothly, students must be carefully guided through the material. Less able students could very easily get lost in the sheer volume of material the Virtual Economy provides. Time spent on developing the guidance notes will be time well spent: the less ambiguous they are the less you are likely to be bothered with student queries. Unlike clarity, the level of detail you provide in the guidance notes is optional. The level of detail you provide will ultimately be determined by the quality of the students you are looking to assess. The more able and independent the students, the more you might be inclined to minimise the detail of the guidance given. Such a consideration will also spill over into the tasks you ask of the students. For first year students, for example, the assignment tasks are likely to be constrained (the more mixed ability the more constrained they are likely to become). With final year students, in contrast, with a broader and deeper understanding of economics, you might be inclined to let students explore. For example, rather than using the policy alternatives detailed in the model, students might be asked to construct their own policy framework, given the current state of the economy, and evaluate the reasons for their policy choice and its outcomes.

In order to encourage independent learning - a key aspect in promoting active learning - it is important that students are given freedom to identify and articulate what they see as relevant, and in the case above, how it relates to their chosen business. In the assignment examined above, other than being provided with a general list of things that might be considered, students were left very much to their own devices. Once again, with less able students more guidance might be given at this stage. Equally, with more able students it might even be possible to disband any aid and simply ask students to establish their own criteria for assessing business performance.

The quality of the work produced in the first year this assignment was set, was very good. The average mark was above that given in previous years when a straight library-based essay was set. What seemed to happen was that students who spent time on the work, both academically and in respect to presentation, were rewarded. When marking, it was far easier to discriminate between students in terms of effort and to reward those students who had clearly put in time to produce their work. This is more difficult to do with the traditional essay format.

Marking the Virtual Economy assignment

If there is one difficult area, then it is the assignment's marking, even if you are an experienced marker. The reason for this is that the openness of student answers, and the fact that they might write and approach their assignment in so many different ways, it is almost impossible to produce a template of key marking points. In order to establish some standard reference points and ascertain level, a bundle of scripts were marked independently by a number of colleagues. The first attempts at this exposed the difficulties faced, with a wide variation in marks awarded: marks diverged by between 15 and 20 percentage points for over ten per cent of scripts. Tutors then met to negotiate marks. Once a standard had been established, a sheet was complied identifying what general points and attributes markers should look for. Along with this, copies of marked scripts were provided with comments explaining why they received the grades they did. Even though this process was time-consuming it was felt to be necessary, if consistency within the marking team (6 individuals) was to be maintained. Even with the sheet identifying general attributes and guidelines, each script took upwards of 30 minutes to mark.

Evaluating the experience: the student's perspective

It was anticipated that, prior to asking students what they felt about the Virtual Economy assignment, they would express a desire to return to the more straightforward essay. In fact, the response we received about the assignment was incredibly positive. Many students commented that, even though they found the assignment very challenging, they also found doing the assignment very rewarding. A number of students commented that they were so glad that they did not have to get into the fight for library books, a perennial problem!

Revisions for the future

For the following year a number of revisions concerning the Virtual Economy assignment were made. First, the percentage of coursework mark devoted to the assignment was increased from 30 to 40 per cent. It was felt that the size of the assignment took up a large number of student hours, in both writing and investigation, and students need an added incentive to devote the amount time required. Second, the remaining 10 per cent of coursework was converted into a multi-choice test. This was primarily to reduce the marking load on staff, given the hours required to mark the Virtual Economy assignment. Third, it was felt that the macro section of the course programme should be more closely linked to the themes of the Virtual Economy assignment. The aim was to integrate the policy aspects of the assignment more closely to theory. It was felt that if there was a weakness in the answers to the assignment, it was in the lack of theory underpinning many of the arguments students advanced.


Members of the course team involved in developing and marking this assignment have found it a rewarding experience, and the evidence thus far would suggest that students appreciate its value. It is felt not only that the assignment develops skills in it own right, but that it enables students to build and articulate skills they have been encouraged to develop over the year. As such, we feel that the assignment has a lot to offer in promoting active learning.

Appendix: Details of the floors in The Virtual Economy

Ground floorChancellor's OfficeGeneral advice on running the economy and economic targets.
InformationA students' guide, a teachers' guide, details about the model and details of the organisations involved in creating the Virtual Economy.
1st floor -
Case Studies
PeopleCase studies looking at the effects of a variety of policies on families with different income levels.
BusinessCase studies looking at the effect of different policies on five very different firms.
GovernmentCase studies looking at the sort of policies that governments of different political complexions may adopt.
2nd floor -
Economic Policy
AdvisorsGeneral advice on running the economy and more specific advice on fiscal and monetary policy.
Policy toolsThe main policy tools are income tax, VAT (and other indirect taxes), government expenditure and interest rates. For each policy tool there is an explanation, relevant theories and worksheets.
OutcomesThe main policy tools are unemployment, inflation, economic growth, the PSNCR and the debt ratio. For each outcome there is an explanation, relevant theories and worksheets.
3rd floor -
EconomistsIn this room there is full information on a variety of Economists; biography, details of their work, theories and policies. You can choose from a timeline.
TheoryIn this room there are full details of Neo-classical, Keynesian and Monetarist theory.
GlossaryA full glossary of all economic terms used in the Virtual Economy. Clicking on the book icon anywhere in the site will take you to the glossary.
4th floor -
The Model
Whole floorStudents play being Chancellor and input tax rates (various types of direct and indirect), levels of welfare benefits, government current and capital expenditure, interest rates and types of budget constraint. The model output page gives the impact of the changes on various macroeconomic and microeconomic variables and on particular types of family.

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