Grades 6-8, 9-12
Standard
Standard: 15
- Students will understand that: Investment in factories, machinery, new technology, and in the health, education, and training of people stimulates economic growth and can raise future standards of living.
- Students will be able to use this knowledge to: Predict the consequences of investment decisions made by individuals, businesses, and governments.
Standard: 10
- Students will understand that: Institutions evolve and are created to help individuals and groups accomplish their goals. Banks, labor unions, markets, corporations, legal systems, and not-for-profit organizations are examples of important institutions. A different kind of institution, clearly defined and enforced property rights, is essential to a market economy.
- Students will be able to use this knowledge to: Describe the roles of various economic institutions and explain the importance of property rights in a market economy.
Standard: 12
- Students will understand that: Interest rates, adjusted for inflation, rise and fall to balance the amount saved with the amount borrowed, which affects the allocation of scarce resources between present and future uses.
- Students will be able to use this knowledge to: Explain situations in which they pay or receive interest, and explain how they would react to changes in interest rates if they were making or receiving interest payments.
Standard: 16
- Students will understand that: There is an economic role for government in a market economy whenever the benefits of a government policy outweigh its costs. Governments often provide for national defense, address environmental concerns, define and protect property rights, and attempt to make markets more competitive. Most government policies also have direct or indirect effects on people's incomes.
- Students will be able to use this knowledge to: Identify and evaluate the benefits and costs of alternative public policies, and assess who enjoys the benefits and who bears the costs.
Standard: 5
- Students will understand that: Credit allows people to purchase and enjoy goods and services today, while agreeing to pay for them in the future, usually with interest. There are many choices for borrowing money, and lenders charge higher interest and fees for riskier loans or riskier borrowers. Lenders evaluate creditworthiness of a borrower based on the type of credit, past credit history, and expected ability to repay the loan in the future. Credit reports compile information on a person’s credit history, and lenders use credit scores to assess a potential borrower’s creditworthiness. A low credit score can result in a lender denying credit to someone they perceive as having a low level of creditworthiness. Common types of credit include credit cards, auto loans, home mortgage loans, and student loans. The cost of post-secondary education can be financed through a combination of grants, scholarships, work-study, savings, and federal or private student loans.
Standard: 3
- Students will understand that: People who have sufficient income can choose to save some of it for future uses such as emergencies or later purchases. Savings decisions depend on individual preferences and circumstances. Funds needed for transactions, bill-paying, or purchases, are commonly held in federally insured checking or savings accounts at financial institutions because these accounts offer easy access to their money and low risk. Interest rates, fees, and other account features vary by type of account and between financial institutions, with higher rates resulting in greater compound interest earned by savers.
In this economics lesson, students will read and discuss the comic book, “A Penny Saved”.
Introduction
Personal savings in the United States are less than 2% of disposable income. Yet, savings are important for economic growth as businesses and the governments borrow these funds for investment.
The choices you make with your money determine the quality of your life. You know that savings affects your future, but how does savings impact the economy as a whole?
In this lesson, students will explore savings by reading a comic book and discussing their reading. At the conclusion of this lesson, students will see how savings affect the economy and perhaps, start saving.
Learning Objectives
- Use a compound interest formula and a table to see the effects of compounding.
- Use the Rule of 72 to see how many years it takes for an investment to double.
- Calculate the required reserves a bank keeps on deposits.
- Interpret the theory of life cycle saving.
- Calculate the real interest rate, return on investment, savings, and nominal interest rate from data.
Resource List
- A Penny Saved: a comic book from the New York Federal Reserve Bank.
www.preview2.econedlink.org/lessons/docs_lessons/1029_a_penny_saved.pdf - A Penny Saved: a guided reading.
A PENNY SAVED - A Penny Saved: the guided reading answer key.
A PENNY SAVED KEY - Compound Interest Formula from MathWarehouse.
https://www.mathwarehouse.com/compound-interest/formula-calculate.php
Process
1. Direct students to A Penny Saved.
2. Distribute the guided reading, A Graphic Organizer for A Penny Saved.
3. Allow students to read the comic book and work through the guided reading.
4. After students have completed the reading, discuss the following topics:
a. How does the interest rate encourage household saving? [A higher rate might encourage more saving.]
b. How does household saving foster economic growth? [Savings can be used for investment.]
c. How does saving vary over a person’s lifecycle? [Young and old seem to save little while the bulk of saving happens in middle age.]
d. What are some reasons why people save? [Education, emergencies, vacations, etc.]
e. Where are some places where people can save? [Banks and thrifts, stock market, and mutual funds are mentioned in the comic book.]
5. Show and explain how to use the https://www.mathwarehouse.com/compound-interest/formula-calculate.php . Say Juan invests $50 at 10% for 30 years (compounded annually). How much will Juan have at the end of 30 years? $50 (1.10)^30 = $872.47
6. Show how to calculate the real interest rate. Suppose the nominal interest rate is 10% and the expected rate of inflation is 4%. How much is the real interest rate? 10% – 4% = 6%
7. Discuss “Moral Hazard ” with the class. (In financial markets, there is a tendancy to make risky investments because the investment is federally insured.)
8. Discuss the paradox of thrift. (Saving is good on a microeconomic level but on a macroeconomic level, GDP might decline and unemployment might result.)
9. Show data from the St. Louis Fed, FRED data base on personal savings. (Use FRED data series, PSAVERT, https://fred.stlouisfed.org/series/PSAVERT?cid=112 .)
10. Assess the students and assign the Extension Activity.
Conclusion
Students have learned many concepts in this lesson, including compound interest, real interest rate, the Rule of 72, and the importance of savings.
As Nobel Laureate Robert Solow found, savings play a large part in an economy’s capital formation and economic growth. In general, savings fuels economic growth because savings encourages more investment and investment means more capital stock for higher production and income.
When young and forming families, saving tends to be lower, in productive middle age, savings rates are higher, and in old age, savings rates are again lower as people are living on the savings from their middle age. It is true that higher savings rate when a person is young and middle-aged allows the person to enjoy a higher standard of living later in life.
How does the government encourage more saving? There are various plans from tax credits to payroll deductions. By the end of this lesson, students should understand the role of banks in helping to create investments based on the deposits of their customers.
Extension Activity
1. Examine data from the Federal Reserve Data Base, FRED. Use FRED data series, PSAVERT, to examine the https://fred.stlouisfed.org/series/PSAVERT?cid=112 . The comic book, A Penny Saved, showed that the personal savings rate was low. Could personal saving vary with the business cycle? Explain why personal savings actually increases during a recession. [One reason is that households become fearful of the future and save to offset possible unemployment spells.]
Assessment
Have students complete “A Penny Saved” guided reading.
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