Unit 3 Lesson 16 Making Choices about Saving

Unit 3 Lesson 16 Making Choices about Saving and Investing

Introduction • With your shoulder partner. Read the introduction to Making Choices about Saving and Investing. • After each paragraph, discuss with your partner while you take notes. (2 per paragraph)

Let’s test your knowledge. Raise your right had if True and raise your left hand if false. Savings and Investing True or False When people buy U. S. Savings Bonds with their extra income, they are making an economic investment. Money does not have a price. Overall, it is always beneficial to save. Overall price-level changes do not relate to saving or investment decisions. People should choose to save when the interest rate on savings is 3% and the cost of living is rising by 4. 5%. The rule of 72 refers to the amount of time it takes to save enough money to buy a 1972 Corvette. The more money people save, the less money there is available for investments. Rational False The price of money is the interest rate. Savers should weigh the expected benefits and costs of savings. False Personal investing means placing savings in instruments such as U. S. Savings Bonds or saving accounts, or purchasing stocks. Inflation influences the value of money over time. False There may be ties when saving is In such a case, inflation exceeds the return not worth the sacrifice. In periods on savings, making it unwise to save. of high inflation, for example, it is expensive to save. The rule of 72 provides a method for calculating how long it takes for savings to double. False When people save, they make more money available in the loanable funds market. This means more dollars will be available for borrowing and lending.

Economics of Seinfeld This illustrates that when savers save, their assets don't sit idle; they are immediately channeled to some productive investment most often by the banking system or another intermediary (such as the blood bank in this example), but sometimes through direct transfer (such is the case with direct purchase of stocks and bonds, and in this example, the direct transfer of Kramer's blood to Jerry). The Blood In this episode, Kramer is donating blood and saving it in a blood bank for future use. He becomes dissatisfied with high fees at the blood bank, and decides to keep it at home instead. In the meantime, Jerry nicks his jugular with an Exacto knife and needs blood. He awakens in the hospital with three pints of Kramer's blood in him.

When deciding whether to save or consume, people ought to weigh the expected costs against expected benefits. It is important to consider real numbers – adjusted for price-level changes – in making such decisions. • Why are some pieces of paper more valuable than others? – The dollar bill is more than just a piece of paper; it represents purchasing power. • Do dollars ever lose their purchasing power? How might inflation influence the value of money? – Inflation erodes the value of money. Therefore inflation has an important bearing on decisions about whether to save or spend.

Activity 1 Part 1 Savings Account Deposit $3, 500. 00 Add interest earned ($3, 500 x. 03) $105. 00 $3, 605. 00 Total Price of Used Car Price $3, 500. 00 Add inflation ($3, 500 x. 05) $175. 00 New price at year’s end $3, 675. 00 • What do you think Jackie should do? – She should buy the car now. If she waits, she will lose money on purchasing the car because inflation is growing faster than the interest she can earn on her savings.

Activity 1 Part 2 Form of Savings Real interest or rate of return Years to double Passbook savings 2% 36 Money market account 5% 14. 40 U. S. Treasury Bond 6% 12 Stock Market 10% 7. 20 Individuals’ decisions to save or not to save can have widespread implications. What is good (or bad) for the individual might also be good (or bad) for the economy generally. To see why, read Part 3 of Activity 1.

Activity 1 Part 3 A. What is the loanable funds market? A. The loanable funds market is the market that brings together the people who want to supply funds (savers) and the people who want to demand funds (borrowers). B. How does increasing savings cause interest rates to decrease? A. Adding money into the loanable funds market increases the supply of savings dollars. This shifts the supply curve for dollars to the right, causing the price (interest rates) to fall. C. How does reducing savings cause interest rates to increase? A. Reducing the amount of money in the loanable funds market decreases the supply of savings dollars and shifts the supply curve for dollars to the left, causing the price (interest rate) to increase.