Economics & Essential Skills

 

 

 

 

 

 

 

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Class 004

Banks and Banking

Although banks do many things, their primary role is to take in fundsócalled depositsófrom those with money, pool them, and lend them to those who need funds. Banks are intermediaries between depositors (who lend money to the bank) and borrowers (to whom the bank lends money). The amount banks pay for deposits and the income they receive on their loans are both called interest.

Depositors can be individuals and households, financial and nonfinancial firms, or national and local governments. Borrowers are, well, the same. Deposits can be available on demand (a checking account, for example) or with some restrictions (such as savings and time deposits).

 

 

Your Task:

Read the comic book, A Penny Saved from the Federal Reserve Bank of New York, Public Information Department . Please focus on the following topics: compound interest and fractional reserve banking. Complete the study guide below on your own sheet of paper:

 

 1. How does the interest rate encourage household saving?

 2. How does household saving foster economic growth?

 3. How does saving vary over a person's lifecycle?

 4. What are some reasons that people save?

 5. Where are some places where people can save?

 6. Inflation is a term tossed around a lot in Econ class. What is inflation?

 7. The formula for calculating compound interest is: P(1 + i)n where P is the Principal or amount invested, and i is the nominal interest rate, and n is the number of years. (Scroll down a bit on this page--there's a link to a Compound Interest Generator!)

Solve the following: Juan invests $50 at 10% for 30 years (compounded annually). How much will Juan have at the end of 30 years?

 8. The real interest rate is calculated by subtracting the expected rate of inflation from the nominal interest rate. That is, suppose that the nominal rate is 10% and the expected rate of inflation is 3%. The real rate of interest, r, would equal 7%.

Solve the following: Suppose the nominal interest rate is 10% and the expected rate of inflation is 4%. How much is the real interest rate?

 

 

Success comes in cans, failure in can'ts.
- Author Unknown

 

 

Opportunity is always knocking. The problem is that most people have the self-doubt station in their head turned up way too loud to hear it.
- Brian Vaszily

 

 

Opportunity dances with those who are already on the dance floor.
- Jackson Brown

 

 

 

People often say that motivation doesn't last. Well, neither does bathing - that's why we recommend it daily.
- Zig Ziglar

 

 

 

Life is not about how fast you run, or how high you climb, but how well you bounce.
- Unknown

 

A penny saved is a penny earned.
-Ben Franklin

 

 

 

Compounding Interest
When Benjamin Franklin died in 1790, he left $5,000 each to the cities of Boston and Philadelphia. Each city was to create a fund that would last for 200 years. The needy could borrow from the fund at 5 percent interest. After 100 years, each city could withdraw $500,000 from the fund, leaving the rest to work for the next 100 years. Why did Franklin do it? To help people understand the importance of compound interest.

What is compound interest? It's interest earning interest. For example, suppose you saved and banked $100 a year ago. It earned $2 in interest last year. This year, you'll be earning interest on $102 (original savings plus the interest earned). That might not seem like much, but understanding that simple fact can have a major impact on your financial success.

Why is compound interest important to you? Because it can turn just a few dollars today into big money over the course of a lifetime.

Link to a Compound Interest Generator:
http://www.econedlink.org/interactives/index.php?iid=2&type=student

 

 

Resources for this Lesson:
http://www.econedlink.org/lessons/index.php?lid=1029&type=educator

The American Dream-video
https://www.youtube.com/watch?v=k6zpfE7WjHI