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Emily Boyle
Emily Boyle
(Bear Creek - United States)

Teaching the Economy

Financial Crisis Glossary

Procedure

Look at a short article or video with the latest economic news. Ask students to highlight or write down terms or concepts they don't understand. Print out the financial crisis glossary (below). If the words are not in the glossary, divide the class into groups to use the internet to research the remaining concepts. As a class review any major concepts .

Divide the class again, this time into pairs, and have students explain the current melt down to each other using their own words. Once all students have had time to explain to their partner pick two or three students to present to the whole group. Ask the rest of the class to vote on who had the most succinct and correct explanation of the situation.

Lastly, ask each pair of students to brainstorm further questions about the current situation using new vocabulary and concepts. You can enter those questions at Paul Solman's Business Desk -- make sure you mention that you are a class using this assignment. Include an email where we can send the answers.
FINANCIAL CRISIS GLOSSARY -

401(K) plan - An investment and savings plan that enables workers to put away money tax free into an account they can access when they retire (around age 65). 401Ks create a tax incentive to save money for retirement.

Bank

  • a business establishment which keeps money for saving or commercial purposes.
Banks also loan money and exchange foreign currencies.

Bank run (bank panic) - A series of unexpected cash withdrawals caused by a sudden decline

in confidence or fear that the bank will be closed, i.e. many depositors withdraw cash almost simultaneously. Since the cash reserve a bank keeps on hand is only a small fraction of its deposits, a large number of withdrawals in a short period of time can deplete available cash and force the bank to close and possibly go out of business.

Capital -The wealth - cash or other assets - used to fuel the creation of more wealth. Within companies, often characterized as working capital or fixed capital.

Central bank - The principal monetary authority of a nation, which performs several key functions, including issuing currency and regulating the supply of credit (see credit) in the economy. The Federal Reserve is the central bank of the United States.

Central bank intervention - The buying or selling of currency, foreign or domestic, by

central banks in order to influence market conditions or exchange rate movements.

Commercial bank - Bank that offers a broad range of deposit accounts, including checking,

savings deposits and extends loans to individuals and businesses. Commercial banks can be contrasted with investment banking firms, such as brokerage firms, which generally are involved in arranging for the sale of corporate or municipal government bonds and securities.

Credit - When you borrow money, you promise to pay in the future. A "line of credit" is permission from a bank to borrow money.

Credit crunch - The situation created when banks hugely reduce their lending to each other because they are uncertain about how much money they have and whether the institution they lend to will be able to pay it back. This in turn results in more expensive loans and mortgages for ordinary people.

Debt - Money owed; also known as liability.

Default

  • Failure to meet the terms of a credit agreement.
Equity - Ownership interest in an asset after liabilities are deducted. For example, the value of your house after deducting the total amount of your mortgage.

Federal Deposit Insurance Corporation (FDIC) - An independent deposit insurance agency

created by Congress in 1933 to maintain stability and public confidence in the nation's banking system. The FDIC identifies, monitors and addresses risks to the deposit insurance funds. The FDIC protects bank accounts up to $250,000 (the amount was $100,000 before Congress passed the rescue plan in October 2008)

Federal Reserve Bank - One of the 12 operating arms of the Federal Reserve System,

located throughout the nation, that together with their 25 branches carry out various functions, including operating a nationwide payments system, distributing the nation's currency and coin, supervising and regulating member banks and bank holding companies and serving as banker for the U.S. Treasury.

Federal Reserve System - The central bank of the United States, created by Congress

and made up of a seven-member Board of Governors in Washington, D.C., 12 regional Federal Reserve Banks, and their 25 branches.

Finance company - A company that makes loans to individuals.

Foreclosure - The legal process used to force the payment of debt secured by collateral (such as a house) whereby the property is sold to satisfy the debt. Usually means a family needs to leave their house because they cannot pay their mortgage.

Inflation

  • An increase in the general price level of goods and services.
Interest

  • When you borrow money from a bank, you pay interest, a fee for the use of money
over time. For instance, if you borrow $100,000 for a house, you may end up paying back $300,000 at the end of the 30 year mortgage. Interest also refers to the money earned on a savings account.

Investing - Buying part of a company, enterprise or fund in the hopes of making more money.

Liquidity - The liquidity of something is how easy it is to convert it into cash. Your current bank account, for example, is more liquid than your house. If you needed to sell your house quickly to pay bills you would have drop the price substantially to get a sale.

Liquidity risk - The risk that a bank will not have sufficient cash or liquid assets to meet borrower and depositor demand.

Loan

  • When you borrow money and promise to pay it back-with or without interest.
Moral hazard - The risk that someone is cheating, has provided misleading information,

or has an incentive to take unusual risks in a desperate attempt to earn a profit.

Mortgage

  • When you borrow money from a bank to buy a house.
Mortgage-backed securities

  • From about 2001 to 2006, Wall Street firms bought the mortgages on lots of houses
and put them all together in a pool. They then sold slices of the whole pool of mortgages to investors. The repackaged debt from the pool of mortgages were then traded and re-traded. As the mortgages were moved around, more funds were freed up to lend to more homeowners.

Regulation - A principle rule, or law designed to control or govern how the financial system works. For instance, banks are required to keep a certain amount of cash on hand, but those regulations were scaled back at certain times.

Security - Essentially, a contract that can be assigned a value and traded. It could be a stock, bond or mortgage debt, for example.

Sub-prime mortgages - Home loans offered to people who have had financial problems or who have low or unpredictable incomes. These loans often had high interest or interest rates that went up after a certain number of payments.

Extension Activities

Students can write an essay on how the financial crisis is affecting them on a personal, community or state level. Send completed essays to extra@newshour.org

Economy Lesson Plan: LOOKING FOR THE BOTTOM

Overview:

In this activity, students will look at look at data from past recessions, the conditions that led to the entry and exit of these recessions, and compare this with the current recession.  Then students will track four economic indicators – industrial production, payroll employment, inflation-adjusted personal income, and volume of sales of the manufacturing and trade sectors – over  several months to determine if and when the U.S. economy as bottomed out of the current recession.  They will periodically theorize on the state of the U.S. economy and compare their ideas with that of economic experts. They will then compile their findings in a final report.

Background:

How do we know when we’ve hit the bottom? Is it when the stock market begins to move consistently into positive territory? Or, is it when we see increased growth in the gross domestic product (GDP) over a period of time? Even leading economists don’t exactly agree when an economy in recession has hit bottom. They look at many different economic conditions or “indicators” on how the economy is doing. One of the leading organizations that monitor the economy is the Conference Board (http://www.conference-board.org) a non-profit organization that provides information on the global economy. Economists use this data to determine the state of the economy and whether it is advancing or receding.

The ten factors are:
-The average weekly hours worked by manufacturing workers

-The average number of initial applications for unemployment insurance

-The amount of manufacturers' new orders for consumer goods and materials

-The speed of delivery of new merchandise to vendors from suppliers

-The amount of new orders for capital goods unrelated to defense

-The amount of new building permits for residential buildings

-The S&P 500 stock index

-The inflation-adjusted monetary supply

-The spread between long and short interest rates
consumer sentiment 

Procedure:

Activity A – Examining Past Recessions
In this activity, students will examine four historical charts that look at recessions from 1959 to 2008. They will look at four economic indicators that economists use to determine whether the country entering, in, or exiting a recession.

Divide the class into small groups of 2-3 students and distribute a copy of Student Handout: Four U.S. Economic Indicators – 1959-2008 to each group. Have students examine the charts and discuss the following questions:

Reading the Charts

  1. Identify what each of the four charts measures in terms of the U.S. economy and describe how each of these categories is important to the U.S. economy.
  2. How many recessions are indicated on these charts?
  3. Approximately how long did the longest of these recessions last?
  4. How long has the current recession lasted so far?
  5. What does the overall direction of the line in each chart from 1959 to 2008 tell you about the overall health of the U.S. economy?
Discussion Questions (more research might be needed)

  1. What do you think is the current status of these four economic indicators in your state? Find out by checking your state’s departments of labor and economics.
  2. Explore the history of each of these recessions using information from the library or the Internet. You can find information on each of these recessions from the year the recession started. As an example, “The U.S. recession of 1973” or “the U.S. recession of 2001.” What factors got the country into the recession? Are any of these factors similar to the factors that created the most recent recession?
  3. What factors got the U.S. out of the past recessions? Could any of these factors help get the U.S. out of this recession?
  4. What advice do you have for President-elect Obama?
  5. What might be some of the positive aspects that could come about because of this recession?
Activity B – Tracking the Current Recession

In this activity, students will chart the progress of the U.S. economy studying the four economic indicators reviewed in Activity A. They will monitor these economic indicators over the next several months and possibly to the end of the school year, depending on how quickly the U.S. economy recovers.

  1. Have students stay in their same groups from Activity A or redistribute the groups into new small groups of 2-3 students. This activity can also be set up as an individual project.
  2. Distribute Student Handout: Tracking the Recession.
  3. Review the directions with students. Have students take note of when the reports come out (in most cases monthly).
  4. During the course of their research, periodically monitor students’ progress to make sure they are recording the data correctly.
  5. After a designated period of time, have students compile their data in large charts similar to the ones they reviewed in Activity A and summarize their findings on the state of the economy.
  6. Have students present their findings to the class.
Information on the four economic indicators

Employment- http://www.bls.gov/news.release/empsit.toc.htm and click Employment Situation Summary.

Personal Income- http://www.bea.gov/national/nipaweb/SelectTable.asp?Selected=N#S2 and scroll down to table 2.6 under Personal Income and Outlays

Industrial Production- http://www.federalreserve.gov/releases/g17/current/default_sup.htm and click Current Monthly Release, scroll down to Total Index on the Industrial Production and Capacity Utilization: Summary chart

Manufacturing and Trade Sales- http://www.census.gov/mtis/www/mtis.html and click the HTML link for the Current press release.

McRel compendium of K-12 Standards Addressed:
Economics
Standard 5: Understands unemployment, income, and income distribution in a market economy
Benchmark 4:  Understands that the unemployment rate (i.e., the percentage of the labor force considered to be unemployed rises during a recession, and the economy’s production is less than its potential level.

History
Standard 30: understands developments in foreign policy and domestic politics between the Nixon and Clinton presidencies.
Standard 31: understands economic, social, and cultural developments in the contemporary United States.

ECONOMIC VIDEO PROJECT

 

Overview
Our next video project is here! Video Your Vote was such a success, we want to use your students' enthusiasm to explore how the economic downturn is affecting your communities and lives. We hope you and your class will participate. The deadline for YouTube submissions for this project is December 31.

In the lesson plan below you'll find a few suggested topics and ideas for interviews. Please have your students brainstorm questions to ask their interview subjects.  The interviews can be separate videos or edited together into a report.

Procedure
HOW'S BUSINESS?
Explore how the economy is affecting different industries by doing a series of short interviews with business owners, managers, employees or costumers. Try to find businesses that are different sizes and serve different needs.

You could talk to the manager of a large grocery chain store, clothing store or gas station, or the owner of a beauty shop or a small family-owned business. You could also talk to the manager of a local bank, a real estate agent in the area or someone in the construction industry. Once you have talked to some of the business owners and operators, try talking to their costumers.

Some topics to explore in your interviews:

  • How is the economy specifically affecting that business or industry?
  • Have retailers had any trouble getting products from their suppliers?
  • Are people and business taking any longer to pay their bills?
  • Is this business better or worse off than those in other industries?
  • Has the business experienced an economic slump like this before?
  • Have customer habits changed in the past year? Are they selling more
or less of certain types of goods or services?
  • What are the businesses doing to attract more costumers? If they are cutting prices, by how much?
  • What, if anything, are they doing to cut costs? Have they had to sell
parts of the business, let employees go, stop selling certain products?

WALLET WOES
Interview parents and students about how the economy is affecting their lives, spending habits and priorities.

Some topics to explore in your interviews:

-How are the economic problems trickling down to individuals in your area?
-What level of stress are people feeling about the economy?
-With the holidays coming up, how will things be different this year?
-What are some of the first things both students and adults are willing to give up to save a little money? What are some of the things they are not willing to give up?
  • Are people borrowing less?
  • How much less are people spending?

ECONOMIC NEWS REPORT
If you and your class would like to try editing a video piece together, you can create one news-style report about the economic health of your area. Interview business owners, people in the real-estate industry, local government officials, parents or students. Use any of the suggested topics or sources from the activities above. Try to pick people who talk passionately. Remind them not to look at the camera. Shoot some footage of them working, and of the most interesting sights in and around their workplace. (You will need such footage if you plan to write narration.) Try to give the story a beginning, middle and end. The viewer should know, after watching it, what the point of the story was. Above all, try to be interesting and even, if possible, entertaining.

UPLOADING
When you are ready to upload a video for this project simply upload to YouTube and tag with PBSschool . We will be collecting your videos and posting them to our YouTube channel as well as the NewsHour Extra Web site.

Please let us know if you have any questions!

Link: In-depth Coverage: Moral Hazard

 

NewsHour website containing indepth coverage on the current housing crisis, banking, and the recession.

Link: EconomicIndicators.gov

 

From the Economics and Statistics Division of the U.S. Department of Commerce providing timely access to key economic indicators.

Navigate to This External Web Link:

Link: The Conference Board

 

The Conference Board a non-profit organization that provides information on the global economy.

Navigate to This External Web Link:

Countries in the G20 Confront the Global Economic Crisis

 

Students will understand that the current economic crisis is a “global event” that impacts different nations in similar and different ways.

National Bureau of Economic Research

 

A nonprofit, nonpartisan organization promoting a greater understanding of how the economy works.

Navigate to This External Web Link:

The Housing Crisis: GDP, Housing Bubble, Recession

Content:
 




Objective
Help students understand the housing bubble and the current U.S. and global economic crisis

Materials

Indepth Coverage: Moral Hazard
NewsHour Report on Slumping Housing Prices- 2006
GDP Chart
Shiller Chart
(Optional) "Popular Delusions and the Madness of Crowds" by journalist Charles Mackay
(Optional) William Hogarth image of the "South Sea Bubble"
Video Transcript with Time Codes
Paul Solman Business Desk

Procedure
1. Start the class by playing the first section of Paul Solman's report on housing. You can look at thetime codes here.

2. Write the rate of GDP growth for the third quarter of 2006 on the blackboard: 1.6%. GDP grew at a "real" annual rate of only 1.6%, July through September. Note that "Real" means after factoring in any inflation.

3. Next discuss what GDP means: "GROSS DOMESTIC PRODUCT" is how much the economy produces in a given year. "Gross" here means total (as opposed to "disgusting" or "yucky"). "Domestic" means everything produced inside the country, no matter by whom. (So cars being made by a Japanese firm in Ohio count - minus the parts that were shipped from Japan or elsewhere) "Product" means goods and services - everything that has a price and is recorded as sold that year. The President's salary is included. So is a prison guard's. But a parent's hours caring for a baby - or doing the housework - is not, unless someone is paying for it. Another way of putting it: GDP is the total legal sales of the economy in a 12-month period.

4. Next, show how that growth rate compares to previous years: 2005, 2000, the 1990s, the past 100 years.Click here for growth rate chart

5. Ask the question: Now that you know this, how would YOU have predicted which way the economy was going?

6. Introduce another so-called 'leading economic indicator': HOUSING STARTS. "Down 30%"

7. Note that a 30% drop knocks a full percentage point off of economic growth. How does that work?

[The answer: 1% of economic growth is 1% of GDP growth, which was roughly 1.6% of $13 trillion dollars. 1.6% of $13,000,000,000,000 is what? About $200 billion. 1% of that: $2 billion. An average new home cost nearly $300,000 to build in 2006. A 30% drop meant an anticipated 700,000 fewer homes over the course of the year. 700k x $300,000 = roughly $2 billion.]

8. Ask whether knowing the Housing Starts information affects the predictions of where the economy was going in Nov. of 2006? You can remind the class of the definition of a recession: two consecutive quarters of the year in which the GDP actually shrinks. A half-year of what's called "negative growth."

9. Does the class agree with a deep recession, as Nouriel Roubini was forecasting?

10. Play the next part of the video in which economic forecaster Ed Yardeni, a longtime Wall Street bull, was asked to listen to Nouriel Roubini, and respond.

11. Ask the class what they think now. Pass out the Shiller Chart
Ask: Isn't it true that the higher prices rise, the harder they fall? How many of you remember the Internet stock bubble?

12. OPTIONAL PRIMARY SOURCE ACTIVITY: Hand out a selection from the 19th century classic"Popular Delusions and the Madness of Crowds" by journalist Charles Mackay. It describes a stock bubble in the early 1700s, in the shares of a company, run by a Scotsman named John Law. The "Mississippi Company" was given, by the French government, exclusive trading privileges to the great river Mississippi and the province of Louisiana, then owned by France. "The country was supposed to abound in the precious metals." In addition, early in 1719, the French king also gave the Mississippi Company the exclusive privilege of trading in the East Indies, China, and the South Seas.

There is also a William Hogarth image of the "South Sea Bubble"

According to an academic study, "The Compagnie share price was around 500 livres in May 1719, rose to nearly 10,000 livres in February 1720, and declined to 500 livres in September 1721." In other words, similar in scope to the American Crash of '29.

The Mississippi Company went bankrupt that year and John Law had to flee to England.

13. Return to the question: In November of 2006, was the housing bubble bursting, or wasn't it? Play the next segment

14. Ask what the class thinks now. Note that Ed Yardeni has, for most of his career, been an economic optimist. He uses the acronym GGBAT to describe the era we live in: the Greatest Global Boom of ALL Times.

Nouriel Roubini, by contrast, has been warning of a bubble for years.

Do you think that colored their views in 2006?

15. Play the rest of the report

15. Ask the class if they think economic forecasting is futile or worthwhile and why.

You may choose to end with a quote from economist John Kenneth Galbraith: "There are two kinds of economist: those who don't know the future, and those who don't know they don't know."

Extension Activities
Students can write an essay on how the financial crisis is affecting them on a personal, community or state level. Send completed essays to extra@newshour.org

NCEE Standard 1 : Scarcity
Productive resources are limited. Therefore, people can not have all the goods and services they want; as a result, they must choose some things and give up others.

Standard 3 : Allocation of Goods and Services
Different methods can be used to allocate goods and services. People acting individually or collectively through government, must choose which methods to use to allocate different kinds of goods and services.

Related concepts: Economic Systems, Market Structure, Supply, Command Economy, Market Economy, Traditional Economy

Standard 4 : Role of Incentives
People respond predictably to positive and negative incentives.

Standard 7 : Markets - Price and Quantity Determination
Markets exist when buyers and sellers interact. This interaction determines market prices and thereby allocates scarce goods and services.

Related concepts: Market Structure, Markets, Price Floor, Price Stability, Quantity Demanded, Quantity Supplied, Relative Price, Exchange Rate

Standard 8 : Role of Price in Market System
Prices send signals and provide incentives to buyers and sellers. When supply or demand changes, market prices adjust, affecting incentives.

Related concepts: Non-price Determinants, Price Floor, Price Stability, Supply, Determinants of Demand, Determinants of Supply, Law of Demand, Law of Supply, Price Ceiling, Substitute Good, Price

Standard 11 : Role of Money
Money makes it easier to trade, borrow, save, invest, and compare the value of goods and services.

Related concepts: Exchange, Money Management, Money Supply, Currency, Definition of Money, Money, Characteristics of Money, Functions of Money

Standard 12 : Role of Interest Rates
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.

Related concepts: Interest Rate, Monetary Policy, Real vs. Nominal, Risk, Investing, Savers, Savings

Standard 14 : Profit and the Entrepreneur
Entrepreneurs are people who take the risks of organizing productive resources to make goods and services. Profit is an important incentive that leads entrepreneurs to accept the risks of business failure.

Related concepts: Taxation, Costs, Costs of Production, Entrepreneur, Risk, Taxes, Cost/Benefit Analysis, Innovation, Entrepreneurship, Inventors

Standard 15 : Growth
Investment in factories, machinery, new technology, and in the health, education, and training of people can raise future standards of living.

Related concepts: Incentive, Interest Rate, Opportunity Cost, Production, Technological Changes, Trade-off, Trade-offs among goals, Human Capital, Intensive Growth, Investment, Physical Capital, Productivity, Risk, Standard of Living, Economic Efficiency, Economic Equity, Economic Freedom, Economic Growth, Economic Security, Investing, Business, Businesses and Households, Factors of Production, Health and Nutrition, Savers, Savings, Stock Market

Standard 17 : Using Cost/Benefit Analysis to Evaluate Government Programs
Costs of government policies sometimes exceed benefits. This may occur because of incentives facing voters, government officials, and government employees, because of actions by special interest groups that can impose costs on the general public, or because social goals other than economic efficiency are being pursued.

Related concepts: Cost/Benefit Analysis, Benefit, Costs, Special Interest Group, Barriers to Trade

Standard 18 : Macroeconomy-Income/Employment, Prices
A nation's overall levels of income, employment, and prices are determined by the interaction of spending and production decisions made by all households, firms, government agencies, and others in the economy.

Related concepts: Gross Domestic Product (GDP), Macroeconomic Indicators, Nominal Gross Domestic Product (GDP), Per Capita Gross Domestic Product (GDP), Potential Gross Domestic Product (GDP), Real Gross Domestic Product (GDP), Circular Flow

Standard 20 : Monetary and Fiscal Policy
Federal government budgetary policy and the Federal Reserve System's monetary policy influence the overall levels of employment, output, and prices.

Lesson Plan: Unemployment in Elkhart

Background
With the uncertain global economy NewsHour Economics correspondent Paul Solman reports on unemployment in the town of Elkhart, Indiana offering an opportunity to look at the real world effects of recession and changes to the American manufacturing landscape.

Procedure
Activity A: Assessing Unemployment
Ask students to list luxury goods from their own lives and communities gathering a list of "prior knowledge" items on the board. Distribute Student Handout A and allow students time to fill out the luxury goods section. Lead students in a discussion about the relationship between unemployment and luxury goods. Do luxury good sales slump with unemployment? Why?

Watch Paul Solman's Making Sen$e video on the town of Elkhart, Indiana.

After watching the video ask students to add to the list on the board of luxury goods. As a class draft a definition of a luxury goods and explain why an RV is considered a luxury good

Ask students to define infrastructure and list some examples on the board. Split the students up into partners or small groups and have them write an answer to why a community would invest in its infrastructure

In the small groups go to Bureau of Labor and find the unemployment rate for the local community, for the entire country and fill it out on Handout A.

Staying in the small groups direct students to theBeautiful Bulgaria project and New York's effortto boost economy through infrastructure. Allow at least 15 minutes for students to read and investigate what they do not understand within the projects. Ask them to make changes to their answer for why a community would invest in its infrastructure.

Activity B: Reversing Unemployment
Divide the class into small groups of 3 students and distribute a copy of Student Handout B to each group.

Ask each group to a pick one luxury item from the list the class made earlier to be produced in their town.

Assign each group member one of the following roles: Mayor, CEO, laid-off worker and as a class discuss the top priority of each role. For the mayor, this would be reversing unemployment in town. For the CEO, this would be saving or rerouting the company he/she directs. For the worker, this would be finding a job and being able to provide for his/her family.

In their groups ask students to act their role and advocate for their group while filling out the Student Handout B

Students will conclude the class period in "town meetings," discussing the next step their town needs to take to reverse unemployment in town.

In the final class period, students will vote on the next step they will take as a town. Then each "town" will present the information on their handouts and the next step they voted to take to boost their economy.
 

Extension Activities
To extend the lesson, lead a vote among CEOs only, mayors only, and workers only to compare the different ways townspeople might vote based on personal interests.
 

NATIONAL STANDARDS

Council For Economic Education Standards

Standard 2 : Marginal Cost/Benefit
Effective decision making requires comparing the additional costs of alternatives with the additional benefits. Most choices involve doing a little more or a little less of something: few choices are "all or nothing" decisions.
Related concepts: Decision Making, Profit Motive, Benefit, Costs, Marginal Analysis, Profit, Profit Maximization, Cost/Benefit Analysis


Standard 6 : Specialization and Trade
When individuals, regions, and nations specialize in what they can produce at the lowest cost and then trade with others, both production and consumption increase.
Related concepts: Division of Labor, Production, Productive Resources, Specialization, Factor Endowments, Gains from Trade, Relative Price, Transaction Costs, Factors of Production, Full Employment

Standard 7 : Markets - Price and Quantity Determination
Markets exist when buyers and sellers interact. This interaction determines market prices and thereby allocates scarce goods and services.
Related concepts: Market Structure, Markets, Price Floor, Price Stability, Quantity Demanded, Quantity Supplied, Relative Price, Exchange Rate

Standard 14 : Profit and the Entrepreneur
Entrepreneurs are people who take the risks of organizing productive resources to make goods and services. Profit is an important incentive that leads entrepreneurs to accept the risks of business failure.
Related concepts: Taxation, Costs, Costs of Production, Entrepreneur, Risk, Taxes, Cost/Benefit Analysis, Innovation, Entrepreneurship, Inventors

Standard 15 : Growth
Investment in factories, machinery, new technology, and in the health, education, and training of people can raise future standards of living.
Related concepts: Incentive, Interest Rate, Opportunity Cost, Production, Technological Changes, Trade-off, Trade-offs among goals, Human Capital, Intensive Growth, Investment, Physical Capital, Productivity, Risk, Standard of Living, Economic Efficiency, Economic Equity, Economic Freedom, Economic Growth, Economic Security, Investing, Business, Businesses and Households, Factors of Production, Health and Nutrition, Savers, Savings, Stock Market

Standard 16 : Role of Government
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 redistribute income.
Related concepts: Externalities, Income, Natural Monopoly, Redistribution of Income, Role of Government, Taxation, Transfer Payments, Bonds, Distribution of Income, Income Tax, Maintaining Competition, Monopolies, Negative Externality, Non-clearing Markets, Positive Externality, Property Rights, Public Goods, Maintaining Regulation, Taxes, Regulation, Government Expenditures, Government Revenues

Standard 19 : Unemployment and Inflation
Unemployment imposes costs on individuals and nations. Unexpected inflation imposes costs on many people and benefits some others because it arbitrarily redistributes purchasing power. Inflation can reduce the rate of growth of national living standards because individuals and organizations use resources to protect themselves against the uncertainty of future prices.
Related concepts: Types of Unemployment, Causes of inflation, Consumer Price Index (CPI), Deflation, Labor Force, Unemployment, Unemployment Rate, Inflation

UNEMPLOYMENT IN ELKHART

Background
With the uncertain global economy NewsHour Economics correspondent Paul Solman reports on unemployment in the town of Elkhart, Indiana offering an opportunity to look at the real world effects of recession and changes to the American manufacturing landscape.

Procedure
Activity A: Assessing Unemployment
Ask students to list luxury goods from their own lives and communities gathering a list of "prior knowledge" items on the board. Distribute Student Handout A and allow students time to fill out the luxury goods section. Lead students in a discussion about the relationship between unemployment and luxury goods. Do luxury good sales slump with unemployment? Why?

Watch Paul Solman's Making Sen$e video on the town of Elkhart, Indiana.

After watching the video ask students to add to the list on the board of luxury goods. As a class draft a definition of a luxury goods and explain why an RV is considered a luxury good

Ask students to define infrastructure and list some examples on the board. Split the students up into partners or small groups and have them write an answer to why a community would invest in its infrastructure

In the small groups go to Bureau of Labor and find the unemployment rate for the local community, for the entire country and fill it out on Handout A.

Staying in the small groups direct students to theBeautiful Bulgaria project and New York's effortto boost economy through infrastructure. Allow at least 15 minutes for students to read and investigate what they do not understand within the projects. Ask them to make changes to their answer for why a community would invest in its infrastructure.

Activity B: Reversing Unemployment
Divide the class into small groups of 3 students and distribute a copy of Student Handout B to each group.

Ask each group to a pick one luxury item from the list the class made earlier to be produced in their town.

Assign each group member one of the following roles: Mayor, CEO, laid-off worker and as a class discuss the top priority of each role. For the mayor, this would be reversing unemployment in town. For the CEO, this would be saving or rerouting the company he/she directs. For the worker, this would be finding a job and being able to provide for his/her family.

In their groups ask students to act their role and advocate for their group while filling out the Student Handout B

Students will conclude the class period in "town meetings," discussing the next step their town needs to take to reverse unemployment in town.

In the final class period, students will vote on the next step they will take as a town. Then each "town" will present the information on their handouts and the next step they voted to take to boost their economy.
 

Extension Activities
To extend the lesson, lead a vote among CEOs only, mayors only, and workers only to compare the different ways townspeople might vote based on personal interests.
 

Council For Economic Education Standards

Standard 2 : Marginal Cost/Benefit
Effective decision making requires comparing the additional costs of alternatives with the additional benefits. Most choices involve doing a little more or a little less of something: few choices are "all or nothing" decisions.
Related concepts: Decision Making, Profit Motive, Benefit, Costs, Marginal Analysis, Profit, Profit Maximization, Cost/Benefit Analysis


Standard 6 : Specialization and Trade
When individuals, regions, and nations specialize in what they can produce at the lowest cost and then trade with others, both production and consumption increase.
Related concepts: Division of Labor, Production, Productive Resources, Specialization, Factor Endowments, Gains from Trade, Relative Price, Transaction Costs, Factors of Production, Full Employment

Standard 7 : Markets - Price and Quantity Determination
Markets exist when buyers and sellers interact. This interaction determines market prices and thereby allocates scarce goods and services.
Related concepts: Market Structure, Markets, Price Floor, Price Stability, Quantity Demanded, Quantity Supplied, Relative Price, Exchange Rate

Standard 14 : Profit and the Entrepreneur
Entrepreneurs are people who take the risks of organizing productive resources to make goods and services. Profit is an important incentive that leads entrepreneurs to accept the risks of business failure.
Related concepts: Taxation, Costs, Costs of Production, Entrepreneur, Risk, Taxes, Cost/Benefit Analysis, Innovation, Entrepreneurship, Inventors

Standard 15 : Growth
Investment in factories, machinery, new technology, and in the health, education, and training of people can raise future standards of living.
Related concepts: Incentive, Interest Rate, Opportunity Cost, Production, Technological Changes, Trade-off, Trade-offs among goals, Human Capital, Intensive Growth, Investment, Physical Capital, Productivity, Risk, Standard of Living, Economic Efficiency, Economic Equity, Economic Freedom, Economic Growth, Economic Security, Investing, Business, Businesses and Households, Factors of Production, Health and Nutrition, Savers, Savings, Stock Market

Standard 16 : Role of Government
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 redistribute income.
Related concepts: Externalities, Income, Natural Monopoly, Redistribution of Income, Role of Government, Taxation, Transfer Payments, Bonds, Distribution of Income, Income Tax, Maintaining Competition, Monopolies, Negative Externality, Non-clearing Markets, Positive Externality, Property Rights, Public Goods, Maintaining Regulation, Taxes, Regulation, Government Expenditures, Government Revenues

Standard 19 : Unemployment and Inflation
Unemployment imposes costs on individuals and nations. Unexpected inflation imposes costs on many people and benefits some others because it arbitrarily redistributes purchasing power. Inflation can reduce the rate of growth of national living standards because individuals and organizations use resources to protect themselves against the uncertainty of future prices.
Related concepts: Types of Unemployment, Causes of inflation, Consumer Price Index (CPI), Deflation, Labor Force, Unemployment, Unemployment Rate, Inflation

Making Sen$e

 

Take a look at this unique collection of lesson plans, creative videos, calculators and more to help make money and finance fun and personal.

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WHAT DOES THE FED DO?

Procedure
1. Collect materials needed:

A roll of 40 nickels
Activity 1, 5 copies, printed on white paper and cut apart
Activity 2, fill in date, make 5 copies on colored paper, and cut apart
Activity 3, 3 copies cut apart
Activity 4, one per student
Visual 1, one copy for each student
Visual 2, one copy for each student
Shoe box or other container to store deposits
Paperclips

2. Explain to the students that over the next few days they are going to learn more about the purposes and functions of the Federal Reserve System. Tell them that the Federal Reserve is our nation’s central bank.
Discuss the following:

  1. Why do people use banks?
(Banks provide financial services to individuals, businesses, and state and local governments. These services include checking accounts, savings accounts, certificates of deposit, loans, safe deposit boxes, ATMs, etc.)
 

b. Why do people keep their money in banks?

(It’s more secure in a bank than it is sitting in a box at home. If you keep money in a checking account at a bank, you can write checks and initiate electronic payments against the balances in the account. Banks also pay interest on many of the accounts they offer.)
 

c. How do banks make money?

(Banks make money by taking in deposits and making loans. They charge a higher interest rate on their loans than they pay on the deposits they take in. Banks also make money by charging fees for the services they provide to their customers.)
 

3. Tell students that you are going to open a classroom bank. This bank will be unique because it will accept only deposits and make loans in dollar bills. Tell students that you, the bank manager, will be paying 5 percent interest on all deposits. Have the students take out any dollar bills they have in their pocket. Choose or have the class elect a Recorder for the bank. Remind students that the classroom bank will accept only deposits of dollar bills—no other denomination of notes and no coins will be accepted.
 

4. Explain to the students that they will get all of their dollars back before the end of the class and that you will pay a nickel for each dollar deposited in the bank during the class period. Tell the students that when a bank offers 5 percent interest, it is usually referring to an annual rate of interest of 5 percent, but that you will assume this class period represents a full year. Anyone who deposits a dollar in the bank at the beginning of the class will withdraw the dollar at the end of the class period and get one nickel (5 percent) in interest paid by you, the bank manager.
 

5. Display Visual 1. Distribute a copy of Visual 1 to each student. Instruct the Recorder to record the names of the depositors and the amount they deposit in the bank on Visual 1 as each person gives you a deposit. Ask the students to follow along, recording the deposits on their copy of Visual 1.
 

6. Ask the students who wish to deposit dollar bills in the new bank to raise their hands.
Distribute one deposit slip from Activity 1 to the first 12 students who wish to deposit dollar bills in the new bank. If fewer than 12 students want to deposit dollar bills, that’s okay, but encourage at least a total of $10 in deposits. Limit the total number of dollar bills each student is allowed to deposit to no more than three dollar bills. Ask those students with deposit slips to complete them and line up in front of you in preparation to make their deposits.
 

7. Take the deposit from the first student. Paperclip the money to the deposit slip. Place the money and deposit slip in the shoe box or other container you are using to store deposits. Announce the name of the student and the amount she is depositing. Watch as the. Recorder enters the name of the depositor and the amount she deposited on Visual 1.
Instruct the students to also enter the name of the first depositor and the amount she has deposited on their copy of Visual 1. Complete and issue a deposit receipt from Activity 2 to the depositor. Once the deposit transaction is completed, ask the student to return to her seat. Continue accepting deposits and issuing deposit receipts until all students who wish to deposit dollar bills have made their transactions or 12 students have deposited their money, whichever comes first. Put the box containing the dollar bills away in a safe place.
8. Have the students add up the total deposits. Ask the Recorder to enter the total deposits on Visual 1.
9. Ask the students whether any of them would like to borrow money from the bank.
Distribute one loan application from Activity 3 to the first 12 students who wish to borrow dollar bills from the bank. Explain that each borrower may apply for one, two, or three dollars. Offer the loans at 0 percent interest. While fewer than 12 students may wish to borrow from the bank, encourage at least $10 total to be borrowed from the bank. After the students who wish to borrow money have completed their loan applications, ask them to line up in front of you.
10. Explain to the students that banks review the creditworthiness of borrowers before making loans, but that in this classroom example, you are going to assume that a credit check has been conducted and that all of the students who apply will be getting loans.
Explain that instead of giving cash to each approved borrower, you will open a bank account for each borrower and put the loaned money in the account. You will issue each borrower a receipt for money deposited in the new bank account.
11. Take the loan application from the first student. Approve the loan application of the first student. Announce the name of the student and the amount he is borrowing. Instruct the. Recorder to enter the name of the borrower and the amount he borrowed on Visual 1. Tell the students to also enter the name of the first borrower and the amount he has borrowed on their copy of Visual 1. Complete and issue a deposit receipt from Activity 2 in the amount of the loan to the borrower. Once the loan transaction is completed, ask the student to return to his seat. Continue accepting loan applications, making loans, and issuing deposit receipts until all students who wish to borrow dollar bills have made their transactions or 12 students have deposited their money or the value of the total loans equals the value of total deposits, whichever comes first.
12. Have the students add up the number of dollar bills loaned out by the bank. Ask the Recorder to enter the total loans on Visual 1.
13. Discuss the following:

  1. How many people have deposit receipts? (Answers will vary.)
b. What is the total value of those deposit receipts? (Amount will be the total of deposits and loans in the bank.)
c. Has the bank loaned out all of the money it accepted in deposits? (Answers will vary.)
d. Could all of the people who have deposit receipts withdraw the money in cash in their accounts? (No.)
e. What would happen if all of the people that have deposit receipts came to the bank on the same day to withdraw money in cash? (Not everyone would be able to get money out. The bank would have to make decisions about which depositors got their money out, or the bank would have to stop honoring withdrawal requests.)
14. Explain the following:
• The United States, and most of the world, has a fractional reserve banking system.
• Bank reserves are the amount of deposits not loaned out by banks. A bank’s reserves can be calculated by subtracting a bank’s total loans from its total deposits. Ask the students to calculate Classroom Bank’s current reserves. (Answers will vary.) Write this number on the board. If the total reserves are 0, ask the students why this would cause a problem. (If Classroom Bank’s reserves are 0, then if any of the depositors come in to make a withdrawal, there would be no cash on hand to honor the withdrawal request.)
• In a fractional reserve banking system, banks take in deposits and lend most of the money they take in. People who borrow money from banks use that money to buy houses or cars, start businesses, make home improvements, go to college, etc.
• Unlike in the Classroom Bank, the money loaned out by real banks does not sit in bank accounts—it gets spent almost immediately by the borrowers. Only a small fraction of the amount deposited in banks is kept on reserve, either in electronic accounts at the Federal Reserve or in vault cash. The result is that not everyone can get their money out of the bank in cash on the same day.
• The Federal Reserve requires most banks to hold a portion, up to 10 percent, of their deposits in reserve. These are called required reserves. Ask the students whether Classroom Bank is currently meeting a 10 percent reserve requirement. (Answers will vary.)
• Throughout history, there have been episodes where too many people tried to take their money out of their banks at the same time. During such episodes, banks usually ran out of cash and therefore couldn’t honor withdrawal requests, and many banks went bankrupt. When a bank goes bankrupt, it’s called a bank failure. When many depositors run into a bank at the same time to get their money out, we call that a bank run. When a bank run that begins at one bank spreads to other banks and causes people to generally distrust banks, we call that a bank panic.
15. Ask the students who deposited money in Classroom Bank the following:
Suppose you learned that the bank owner and manager was planning to leave the country and move permanently to Tahiti. What would you do? (Most students will say that they would want to withdraw their money immediately from the Classroom Bank, since they have no guarantee that you aren’t going to take their money with you when you move to Tahiti.)
16. Display Visual 5. Explain to students that:
• Monetary policy involves the Fed is changing the money supply in order to affect interest rates with the goal of price stability, full employment, and maximum sustainable economic growth.
• The Fed has at its disposal three tools of monetary policy:
  1. Reserve Requirements—The
Fed can increase the reserve requirement and thereby reduce the money supply as banks are forced to hold more reserves and lend less. Likewise, the Fed can decrease the reserve requirement and increase the money supply as banks are able to loan more. However, changes in the reserve requirement are made very infrequently and represent an extreme measure for affecting the money supply. Early in the Fed’s history, reserve requirements were fixed by law. The Thomas amendment to the Agricultural Adjustment Act of 1933 first gave the Fed power to change reserve requirements. That power was made permanent by the Banking Act of 1935.
b. Discount Rate—The discount rate, the rate at which banks can borrow from the
Federal Reserve can be increased in order to reduce the money supply and decreased in order to increase the money supply. Banks usually don’t borrow much from the Federal Reserve. Therefore, a change in the discount rate has a relatively small effect on the money supply. Early in the Fed’s history, changes in the discount rate were the primary monetary policy tool available to the Fed.
c. Open Market Operations—Open market operations, the Fed’s purchases and  sales of U.S. Treasury securities, are the primary tool of monetary policy. Open market operations are carried out almost every business day by the Trading Desk at the Federal Reserve Bank of New York. The New York Reserve Bank carries out these operations on behalf of the entire Federal Reserve System. The Trading Desk is actually a staff of people who work at the Federal Reserve Bank of New York and who buy and sell government securities in order to change the money supply and get the federal funds rate, the interest rate that banks charge each other for short-term, usually overnight loans, as close as possible to the target for that interest rate set by the FOMC.
17. Using the information on the Federal Reserve System, the Board of Governors, the Federal Open Market Committee, and previous lessons fill in the blanks Activity 4 so as to accurately portray the structure of the Federal Reserve System.
18. Go over the results as a class.

Extension Activities
For extra credit the students can define the basic concepts of Bank Failure, Bank Panic, Bank Reserves, Bank Run, Discount Rate, Federal , Reserve System, and the Fractional Reserve Banking System.
 

National Standards

Standard 1 : Scarcity
Productive resources are limited. Therefore, people can not have all the goods and services they want; as a result, they must choose some things and give up others.

Related concepts: Capital Resources, Choice, Consumer Economics, Consumers, Goods, Human Resources, Natural Resources, Opportunity Cost, Producers, Production, Productive Resources, Scarcity, Services, Wants, Entrepreneurship, Inventors, Entrepreneur, Factors of Production

Standard 10 : Role of Economic Institutions
Institutions evolve in market economies to help individuals and groups accomplish their goals. Banks, labor unions, 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.

Related concepts: Legal and Social Framework, Mortgage, Borrower, Interest, Labor Union, Legal Forms of Business, Legal Foundations of a Market Economy, Nonprofit Organization, Property Rights, Banking

Standard 11 : Role of Money
Money makes it easier to trade, borrow, save, invest, and compare the value of goods and services.

Related concepts: Exchange, Money Management, Money Supply, Currency, Definition of Money, Money, Characteristics of Money, Functions of Money

Standard 16 : Role of Government
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 redistribute income.

Related concepts: Externalities, Income, Natural Monopoly, Redistribution of Income, Role of Government, Taxation, Transfer Payments, Bonds, Distribution of Income, Income Tax, Maintaining Competition, Monopolies, Negative Externality, Non-clearing Markets, Positive Externality, Property Rights, Public Goods, Maintaining Regulation, Taxes, Regulation, Government Expenditures, Government Revenues

Standard 20 : Monetary and Fiscal Policy
Federal government budgetary policy and the Federal Reserve System's monetary policy influence the overall levels of employment, output, and prices.

Related concepts: Inflation, National Debt, Tools of the Federal Reserve, Discount Rate, Federal Budget, Fiscal Policy, Monetary Policy, Open Market Operations, Reserve Requirements, Budget, Budget Deficit, Central Banking System, Budget Surplus, Causes of inflation