Time Value of Money
Objective
Students will be able to:
- Explain how interest rates and inflation change the value of money over time.
Standard
Standard: 2
- Students will understand that: Effective decision making requires comparing the additional costs of alternatives with the additional benefits. Many choices involve doing a little more or a little less of something: few choices "are all or nothing" decisions.
- Students will be able to use this knowledge to: Make effective decisions as consumers, producers, savers, investors, and citizens.
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: 11
- Students will understand that: Money makes it easier to trade, borrow, save, invest, and compare the value of goods and services. The amount of money in the economy affects the overall price level. Inflation is an increase in the overall price level that reduces the value of money.
- Students will be able to use this knowledge to: Explain how their lives would be more difficult in a world with no money, or in a world where money sharply lost its value.
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.
Concepts
In this economics lesson, students will learn how the value of money changes over time.
Procedure
Warm-up
Open the PowerPoint Slides. Use the Speaking Notes for PPT for talking points or find the notes in the speaking notes of the PPT as well. Show slide #2:
Which would you rather have?
- $100 today
- $100 one year from today
If the interest rate is 5%, $100 today is basically equal to ___ one year from now.
- $95
- $100
- $105
- $150
If you lent a friend $50 two years ago and the interest rate is 2%, he or she now owes you approximately
- $48
- $100
- $50
- $52
Which of these is the most valuable, if the interest rate is 10%?
- $800 today
- $1000 three years from now
- $2000 ten years from now
- $3000 twenty years from now
Review the answers on slide #3.
Modeling
Continue to review slides 3 to 16. The slide deck reviews each concept presented in the warm-up activity including how to calculate present value. Within the slide deck there are references to The Economics of Seinfeld: The Kiss Hello Video. Use the Speaking Notes for PPT in the slide deck to guide students through modeling.
Group Activity
Assign students to work in groups and hand out a copy of Group Activity. The calculations are complicated, so students may need guidance with the math. For the group activity, using the formulas for Future Value and Present Value calculations or the Investopedia Calculators. Have students work in groups of 2-4 to answer the questions. Use the Group Activity Answer Key to review the answers as class.
Assessment
Have the students complete the Exit Ticket and submit their responses before leaving the classroom. Use the Exit Ticket Answer Key as a reference to give student’s feedback on their work.
Extension
Activity 1
Have the students complete the activity In the News: “What $100 Was Worth”. Students will be tasked to complete the following:
$100 is more valuable today than in the future because if you had the money in hand today, you could invest it and earn interest on it. Another reason $100 is more valuable today is because money loses value over time, due to inflation. When your parents (and grandparents) were young, $100 was worth a lot more. Use the link to the article on Business Insider: What $100 was worth in the decade you were born, which explains how the value of $100 has changed over time. Answer the questions.
Use In the News: “What $100 Was Worth” Answer Key to review the answers as a class.
Resources