A Penny Saved
This lesson printed from:
Posted January 3, 2012
Author: Mike Fladlien
Posted: January 3, 2012
Students will read the comic book, "A Penny Saved" published by the New York Federal Reserve Bank. Students will make the information relevant through projects, graphic organizers, teacher instruction, and problems.
- 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.
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.
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 compound interest formula . 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, Personal savings .)
10. Assess the students and assign the Extension Activity.
Have students complete "A Penny Saved" guided reading.
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.
1. Examine data from the Federal Reserve Data Base, FRED. Use FRED data series, PSAVERT, to examine the Personal Savings Rate . 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.]