At one time in your life, you were probably given a gift of money from a relative and were told to save it. Did you save the money in a bank? Buy stock? Put the money in your mattress? Maybe you just spent it. In any case, the choice you made with your money affected your ability to buy the things you desired. How do savings affect the economy as a whole? In this lesson, you will read a comic book that shows the reasons why people save, the effects of compounding on savings, the role of banks in creating money through loans, and examine the personal savings rate in the United States. At the conclusion of this lesson, you will see how savings affect the economy and, perhaps, start saving.
Read the comic book, A Penny Saved from the Federal Reserve Bank of New York, Public Information Department
. You will need instruction on the following topics: compound interest and fractional reserve banking. Complete the study guide then complete the Extension Activity.
1. Use the link provided to read the comic book, A Penny Saved.
2. You will be given a study guide to help interpret and comprehend the concepts in the comic book. It is suggested that you rapidly read the comic book first, then go back and complete the study guide.
3. Read the comic book and work through the study guide.
4. After you have completed the reading, discuss the following topics:
a. How does the interest rate encourage household saving?
b. How does household saving foster economic growth?
c. How does saving vary over a person's lifecycle?
d. What are some reasons that people save?
e. Where are some places where people can save?
5. Listen to your instructor show how to use a compound interest formula
. Solve: Juan invests $50 at 10% for 30 years (compounded annually). How much will Juan have at the end of 30 years?
6. Listen to your instructor explain how to calculate the real interest rate. Solve: Suppose the nominal interest rate is 10% and the expected rate of inflation is 4%. How much is the real interest rate?
7. Research and discuss "Moral Hazard
" with your class.
8. Research and discuss the paradox of thrift
9. Your teacher will show data from the St. Louis Fed, FRED database on personal savings. Discuss and interpret the graph.
10. Complete the Assessment Activity and the Extension Activity.
You 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 equals investment that fosters economic growth.
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.
You will find that you can enjoy a better lifestyle in the later stages of your life if you accumulate wealth now by saving or investing. Because of the magic of compound interest, you will find that the earlier you begin saving the more you will have to spend later.
Complete "A Penny Saved" guided reading and turn in to your instructor.
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 savings vary with the business cycle? Explain why personal saving actually increases during a recession.
© 2014. Council for Economic Education. All rights reserved.