Instruction for Students

Overview of the Experiment

Thank you for agreeing to participate in this experiment being conducted by the Centre
for Experiments in Social and Behavioral Sciences, Department of Economics, J adavpur
University.

We will now give you some simple instructions. You need to make decisions based on
the instructions. You will be able to earn money based on these decisions. The money
will be paid to you in cash at the end of the session.

In this game, you will be a citizen of an imaginary economy. The imaginary economy
will be created by a computer programme. There will be you and seven other participants
as the citizens of this imaginary economy. The economy will function in each year based
upon the decisions all of you take for the previous year.
In order to participate in the session you need to understand three concepts. These are
described below. Please take a few minutes to understand the concepts. The concepts
are economic in nature but can be understood with common sense alone. If you do not
know any economics from before, it does not matter. Here are the concepts:

Inflation
You may have heard about inflation or read about it in the news. In the real world,
Inflation measures general rise in prices of commodities in a country. It is simply the
difference of the price level in this year over the price level of the last year
Now suppose you are in the present year. You can use information upto the last year.
Based on this you need to guess the rate of inflation in the next year.
expressed as a
percentage of the price level of the last year.
The actual inflation
of the present year will depend on this guess

. The inflation this year also depends on
interest rate and expected output gap. These are described below.
Interest Rate
In the real world, Interest Rate is set by the monetary authority. In India such authority is
the Reserve Bank of India. It reflects the

cost of borrowing money (in %) for one year.
Output Gap
This looks like a hard one but is actually not. In the real world, it is the gap between
what the economy can produce using all available resources effectively and what it is
actually producing
Remember, the Output Gap in the economy will depend on how its rate is guessed by the
citizens of the economy. The output Gap in this year will also depend on the guesses
formed about inflation rate.
in one year.
Also remember, in this imaginary economy there will be random shocks. These are
unforeseen events that affect Inflation and Output Gap

You will be shown some information about Inflation, Output Gap and Interest Rate of an
imaginary economy. In each year, all the variables might be important for guessing
inflation and output gap, but it is up to you to work out the relationship (if any) between
them. You are free to use the supplied data in any way you like; you can also disregard
the data. The change in variables will partly depend on your responses and the responses
of the other students as well as any random shocks influencing the imaginary economy.

How to Play in the Session

In this part you will have to guess future values of inflation and output gap of this
imaginary economy. The rules are the same in all the rounds. When you begin the session
you will see the page as shown below on your screen. All data is in percentage.



You are now in year 1 (the present). You can see the actual values for ten previous years,
numbered -9 to 0. You are required to guess the values of inflation and output gap in year
2. You can go up to 2 places of decimals. You are free to use the data shown for year -9
to 0 in any way you like
Press the [Submit] button when you finish.
; you may like to work out any relationship between the three
variables. You can also disregard the data.

Now you are in year 2. The computer has now generated the actual values for year 1.
You will see these three values on your screen. Now you need to guess the values of
inflation and output gap for year 3. Again press the [Submit] button when you finish.
Actual Values Predicted Values
Year Inflation Output gap Interest
rate
Predicted
Inflation
Predicted
Output gap

-9 1.0 1.1 0.0
-8 0.8 -0.9 0.0
-7 1.3 -0.8 0.6
-6 1.5 -0.7 1.0
-5 1.4 -0.8 0.9
-4 0.9 -0.9 0.6
-3 0.6 -0.9 0.1
-2 1.1 -0.9 0.5
-1 1.1 -0.7 0.5
0 1.8 -0.6 1.2
1 YOU ARE HERE
2 Predict this
Value
Predict this
Value
Submit
3 Submit

This will go on for 52 years. The rules are the same for all years.

How your payment is calculated

How much money you earn in the session will depend on how close is the value you
predicted to the value that the computer generated later based on the prediction of all the
eight students in the session.

Example
Let the difference between your prediction and the actual computer-generated value be E.
This is the error you made. Then you earn points from this round according to the
following formula:
375
1 +
75
Check to see that:
If you make an error of 0 (that is E=0) you earn 300 points
If you make an error of 2 (that is E=2) you earn 50 points
If you make an error of 4 (that is E=4) you earn 0 points
Also 100 points will convert to 1 (one) rupee.

The relation between your error and the points you earn is shown below.




All the points you earn by predicting Inflation and all the points you earn predicting
Output Gap will be added after all the years are predicted and converted to money. This
will be paid to you at the end of the session.

What if you have negative points?

You may end up with a negative point for a particular year if your error is more than 4.
In that case your negative point will be recorded for this year and deducted from positive
points earned from predictions in other years.

However, if your total points earned from predicting all 52 years are negative you will be
paid nothing, but no money will be taken from you.

Other Instructions

-50
0
50
100
150
200
250
300
350
0 1 2 3 4 5 6 7
P
o
i
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t
s
Error
During the experiment sessions, it is strictly forbidden to speak with other students who
participate in the experiment. Doing so can lead to the exclusion from the experiment. In
this case, no payment will be made. If you have any questions or problems during the
course of the experiment, raise your hand and the experimenter will come to you. Please
do not ask aloud.

If you have any questions please ask now!