A central bank has essentially one wheel — a short-term interest rate. Raising it cools borrowing and spending; lowering it warms them. But the effect arrives late.
Milton Friedman called them “long and variable lags.” A rate change today reaches spending, then jobs, then prices over roughly a year. So you must set policy for the economy you’ll have, not the one the gauges show now.
Steer by today’s numbers and you overcorrect: you keep pushing until the gauge finally moves, by which point you’ve pushed far too much — a boom, then a bust. The Taylor rule and modern forward guidance are attempts to lead the lag.
Supply shocks are the cruelest test. An oil spike lifts prices and costs jobs at once. Hike hard to fight the inflation and you deepen the recession; do nothing and expectations drift loose. Paul Volcker broke 1970s inflation only by accepting a recession.
Something in the simulation stopped unexpectedly — the lesson continues without it. Nothing you did was wrong; you can move on.