Banking and Interest

1
Banking and Interest

• Social Studies/Economics

2
Descriptive Overview

• Students will calculate interest given the time
  frame and interest rate.
• Students will weigh the advantages and
  disadvantages of higher and lower interest rates.
  
• Students will hypothesize what effect these rates
  will have on the economy

3
Lesson Objectives/Goals

• Students will
• Explain the governments role in the banking
  industry
• Define and calculate interest
• Determine the effect of interest and loans on the
  money supply

4

• You want to buy a car. You ask to have payments
  calculated for both 4- and 5-year loans. When
  you discover the total price for the car, there
  is a difference between the 4- and 5-year totals.
  Why?
• Key Questions What is interest? How does the
  government affect the interest rate? Do loans
  increase or decrease the money supply?

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Terminology/Vocabulary

• Interest Rate

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Background Information

• Interest is the money the bank pays for using the
  borrowers money to lend out.
• Example 3,000 at 4 interest would result in a
  deposit of 3,120
• 3,000 x .04 120
• Total value of deposit 3,120
• The same concept is used when people borrow money
  from banks or other financial interest.
  Borrowers must pay back the amount they are
  using, plus interest. This is called a loan.

7

• Formula for calculating interest
• Interest Principal x Rate x Time P x R x T
• Rate is the rate of interest (expressed as a
  percentage)
• Time is the interest period in years or part of a
  year.

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Monetary Policy

• The Federal Reserve can alter the reserve
  requirements for banks. This process can
  increase or decrease the amount of money banks
  has to lend. This change affects
• money and its value. It also changes the
  availability of loans.

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Monetary Policy

• By lowering interest rates, banks encourage
  people to borrow more money. By raising interest
  rates, loans become more restricted. The more
  money that is available, the lower the interest
  rate.
• These changes in borrowing affect the demand for
  money. Consumers may postpone purchases or
  suspend loan proceedings if interest rates
  increase.

10

• 1. You deposit 5,000 on your wedding day. If
  the money earns 4 interest, how much money will
  you have on your twentieth wedding anniversary?
• 2. Your grandfather loans you 10,000 for
  college expenses. The loan must be paid back
  four years after your graduation. Interest
  accrues for eight years. How much will you end
  up paying your grandfather back if he charges 2
  interest?
• 3. What interest would you earn if you deposit
  2,000 at 8.5 for six years?
• 4. What interest would you earn if you deposit
  8,000 at 6 for four years?
• 5. You take out a small loan to take a vacation
  to Hawaii. You borrow 15,000 for seven years at
  4 interest. What interest would you pay?
• 6. You deposit 1,000 in the bank for five years
  at 3.5 interest. How much money would be in the
  account?
• 7. For high school graduation, you receive
  2,500. You place it in the credit union for
  with a rate of 4. How much money could you
  withdraw in five years?
• 8. You borrow 500 for one year. The interest
  rate is 7. How much will you have to pay at the
  end of that year?