LESSON 23 INTEREST RATES: LET’S GO SHOPPING FOR MONEY 23-1 HIGH SCHOOL ECONOMICS 3 RD EDITION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY Price: $20,000.

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Presentation transcript:

LESSON 23 INTEREST RATES: LET’S GO SHOPPING FOR MONEY 23-1 HIGH SCHOOL ECONOMICS 3 RD EDITION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY Price: $20,000 © M R / Shutterstock.com

LESSON 23 INTEREST RATES: LET’S GO SHOPPING FOR MONEY 23-2 HIGH SCHOOL ECONOMICS 3 RD EDITION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY Lenders Financial Institution Term of LoanInterest Rate Midtown Bank $20, months 4.0% Century Credit Union $20, months 2.0% YourCharge Credit Card $20, months 18.0% Al’s Car Emporium $20, months 8.0%

LESSON 23 INTEREST RATES: LET’S GO SHOPPING FOR MONEY 23-3 HIGH SCHOOL ECONOMICS 3 RD EDITION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY Lenders Financial Institution Term of Loan Monthly Payment Midtown Bank $20, months $ Century Credit Union $20, months $ YourCharge Credit Card $20, months $ Al’s Car Emporium $20, months $488.26

LESSON 23 INTEREST RATES: LET’S GO SHOPPING FOR MONEY 23-4 HIGH SCHOOL ECONOMICS 3 RD EDITION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY Lenders Financial Institution Term of Loan Total Cost of Car Midtown Bank $20, months $21, Century Credit Union $20, months $20, YourCharge Credit Card $20, months $28, Al’s Car Emporium $20, months $23,436.48

LESSON 23 INTEREST RATES: LET’S GO SHOPPING FOR MONEY 23-5 HIGH SCHOOL ECONOMICS 3 RD EDITION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY Interest Rate The price paid for using someone else's money, expressed as a percentage of the amount borrowed (usually expressed as an annual rate).

LESSON 23 INTEREST RATES: LET’S GO SHOPPING FOR MONEY 23-6 HIGH SCHOOL ECONOMICS 3 RD EDITION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY Savings Opportunities Financial Institution Type of SavingsInterest Rate Midtown Bank Passbook account 1.0% Century Credit Union Passbook account 0.25% Johnson Bank5-year CD4.0% Top End Brokerage 10-year CD5.0%

LESSON 23 INTEREST RATES: LET’S GO SHOPPING FOR MONEY 23-7 HIGH SCHOOL ECONOMICS 3 RD EDITION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY Savings Opportunities Financial Institution Type of Savings Total Savings in 10 Years Midtown Bank Passbook account $11,051 Century Credit Union Passbook account $10,253 Johnson Bank5-year CD$14,908 Top End Brokerage 10-year CD$16,470

LESSON 23 INTEREST RATES: LET’S GO SHOPPING FOR MONEY 23-8 HIGH SCHOOL ECONOMICS 3 RD EDITION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY The Market for Loans: Supply Interest rate (Price) Quantity Supply 1% 2% 3% 4% 5% 6% 7% 0% Very few individuals are willing to save or lend their money at a low interest rate. No one is willing to save at 0 or 1% in this market. As we noted earlier, savers will shop around for a higher interest rate. An interest rate of 4% will bring a lot more savers into this market. An interest rate of 6% draws even more savers into the market. They can accumulate a lot more money in a shorter period of time.

LESSON 23 INTEREST RATES: LET’S GO SHOPPING FOR MONEY 23-9 HIGH SCHOOL ECONOMICS 3 RD EDITION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY The Market for Loans: Demand Demand Interest rate (Price) Quantity 1% 2% 3% 4% 5% 6% 7% 0% Borrowers aren‘t very likely to demand money at high interest rates, because they know it will be more expensive to pay back the loan. A lower interest rate draws more borrowers into the market. You would much rather buy a car at 4% than 6%. The lower the interest rate is, the more borrowers decide now is the time to buy a car or house.

LESSON 23 INTEREST RATES: LET’S GO SHOPPING FOR MONEY HIGH SCHOOL ECONOMICS 3 RD EDITION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY The Market for Loans Interest rate Quantity of loans Supply of loans Demand for loans Equilibrium interest rate Equilibrium quantity

LESSON 23 INTEREST RATES: LET’S GO SHOPPING FOR MONEY HIGH SCHOOL ECONOMICS 3 RD EDITION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY The Market for Loans What will happen in the market for loans if more people want to borrow at the same time? Demand for loans Interest rate Quantity of loans Supply of loans Equilibrium interest rate Equilibrium quantity

LESSON 23 INTEREST RATES: LET’S GO SHOPPING FOR MONEY HIGH SCHOOL ECONOMICS 3 RD EDITION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY The Market for Loans What will happen in the market for loans if lenders think more borrowers than normal may not repay their loans? Demand for loans Interest rate Quantity of loans Supply of loans Equilibrium interest rate Equilibrium quantity

LESSON 23 INTEREST RATES: LET’S GO SHOPPING FOR MONEY HIGH SCHOOL ECONOMICS 3 RD EDITION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY Which interest rate are we talking about?

LESSON 23 INTEREST RATES: LET’S GO SHOPPING FOR MONEY HIGH SCHOOL ECONOMICS 3 RD EDITION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY Selected Interest Rates Federal funds rate — The rate one bank charges another for an overnight loan Prime rate — The rate banks charge their best customers 30-year fixed mortgage rate — The rate banks charge homebuyers seeking fixed, long-term loans Automobile loan rate — The rate banks charge for loans used to buy automobiles Credit card rate — The rate credit card companies charge those who use their cards for purchases

LESSON 23 INTEREST RATES: LET’S GO SHOPPING FOR MONEY HIGH SCHOOL ECONOMICS 3 RD EDITION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY Interest rates are linked. Credit card rate ? Federal funds rate Prime rate 30-year mortgage Automobile loan rate ? ? ?

LESSON 23 INTEREST RATES: LET’S GO SHOPPING FOR MONEY HIGH SCHOOL ECONOMICS 3 RD EDITION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY Factors That Affect Interest Rates Loan size Maturity (length of time) Risk Collateral

LESSON 23 INTEREST RATES: LET’S GO SHOPPING FOR MONEY HIGH SCHOOL ECONOMICS 3 RD EDITION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY Maggie – 4% Juan – 8% Sam – 12% Midtown Bank

LESSON 23 INTEREST RATES: LET’S GO SHOPPING FOR MONEY HIGH SCHOOL ECONOMICS 3 RD EDITION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY Who Will You Lend To? What questions will you ask prospective customers?

LESSON 23 INTEREST RATES: LET’S GO SHOPPING FOR MONEY HIGH SCHOOL ECONOMICS 3 RD EDITION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY Who Will You Lend To? Suggested questions: 1.How much money do you want to borrow? 2.For what purpose? Will there be collateral? 3.What is the length of the loan? 4.Do you have a job? 5.How much do you earn? 6.What other loans are you still repaying? 7.Have you ever defaulted on a loan?

LESSON 23 INTEREST RATES: LET’S GO SHOPPING FOR MONEY HIGH SCHOOL ECONOMICS 3 RD EDITION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY Potential Borrowers James Shen Amanda Sykes Diana Starr Michael O’Neill Trevor Johnson

LESSON 23 INTEREST RATES: LET’S GO SHOPPING FOR MONEY HIGH SCHOOL ECONOMICS 3 RD EDITION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY Interest Rates and Inflation If Midtown Bank expects inflation to be 3% over the next few years, it will add 3% to the interest rate it was already charging. Midtown Bank wants to earn 3%“real” interest on a loan, so it charges a loan customer: 3% interest + 3% inflation premium = 6%

LESSON 23 INTEREST RATES: LET’S GO SHOPPING FOR MONEY HIGH SCHOOL ECONOMICS 3 RD EDITION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY Interest Rates are Linked Federal funds rate Prime rate 30-year mortgage Automobile loan rate Credit card rate

LESSON 23 INTEREST RATES: LET’S GO SHOPPING FOR MONEY HIGH SCHOOL ECONOMICS 3 RD EDITION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY Nominal Versus Real Interest Rates The interest rates discussed at the beginning of the lesson—car loans, mortgages, and credit cards—are all nominal rates. That means they include charges for expected inflation. To calculate real interest rates, economists subtract the inflation rate from nominal rates.