1. The Circular Flow Model and the Market System

2. Circular Flow You decide to by a car so you go to the dealer and exchange money for the car. The dealer has rented land and buildings while also hiring workers to produce the cars. The employees earn income for their labor and use that income to buy food from the grocery store. This transaction generates revenue for the grocery store, which also hires workers and pays them income that they then use to purchase goods and services. Your expenditure for the car is part of a circular flow. You decide to by a car so you go to the dealer and exchange money for the car. The dealer has rented land and buildings while also hiring workers to produce the cars. The employees earn income for their labor and use that income to buy food from the grocery store. This transaction generates revenue for the grocery store, which also hires workers and pays them income that they then use to purchase goods and services. Your expenditure for the car is part of a circular flow.

3. Circular Flow continued Now, complicating the prior story is the fact that some car's are made in Japan and then shipped to the U.S. Your purchase also creates revenue for the manufacturer in Japan, who pays Japanese workers to produce car's. Also, when you buy a car, you must pay a tax to the government, which uses tax revenues to pay for police protection, national defense, and other services Now, complicating the prior story is the fact that some car's are made in Japan and then shipped to the U.S. Your purchase also creates revenue for the manufacturer in Japan, who pays Japanese workers to produce car's. Also, when you buy a car, you must pay a tax to the government, which uses tax revenues to pay for police protection, national defense, and other services

5. The Market System Consumer Sovereignty- the authority of consumers to determine what is produced through the purchases of good and services Consumer Sovereignty- the authority of consumers to determine what is produced through the purchases of good and services Consumers exercise so much power b/c the name of the game for businesses is profit and the only way they achieve this is by satisfying consumer wants Consumers exercise so much power b/c the name of the game for businesses is profit and the only way they achieve this is by satisfying consumer wants

6. Consumer Power In the 1950’s and 1960’s people were eating out more then ever. They wanted more restaurants and fast-food outlets. In the 1950’s and 1960’s people were eating out more then ever. They wanted more restaurants and fast-food outlets. As a result McDonalds, Wendy’s, White Castle, Pizza Hut, Godfathers Pizza, Big Boy’s and other fast-food outlets flourished. As a result McDonalds, Wendy’s, White Castle, Pizza Hut, Godfathers Pizza, Big Boy’s and other fast-food outlets flourished. By the 1970’s the average number of meals per person eaten out daily exceeded one (excluding meals prepared at home and eaten elsewhere) By the 1970’s the average number of meals per person eaten out daily exceeded one (excluding meals prepared at home and eaten elsewhere)

8. Profit and Allocation of Resources When a good or service has profit potential someone with entrepreneurial ability will put together the resources needed to produce that gizmo When a good or service has profit potential someone with entrepreneurial ability will put together the resources needed to produce that gizmo Hopefully they sell their gizmos for more then they paid for land, labor, capital. (that's profit) Hopefully they sell their gizmos for more then they paid for land, labor, capital. (that's profit) If the entrepreneur loses money they may opt to stop producing that good If the entrepreneur loses money they may opt to stop producing that good The resources then used in the losing operation are available for an activity of possible higher value (see book pages 74 and 75) The resources then used in the losing operation are available for an activity of possible higher value (see book pages 74 and 75)

9. The Flow of Resources Resources naturally flow from an activity where they have a relatively low value to and an activity with a higher value (ex, rubber sole shoes go out of style and the rubber is now used to produce a new popular brand of tires) Resources naturally flow from an activity where they have a relatively low value to and an activity with a higher value (ex, rubber sole shoes go out of style and the rubber is now used to produce a new popular brand of tires) Adam Smith described this phenomenon in his 1776 treatise (essay) “The Wealth of Nations,” saying it was as if an invisible hand reached out and guided resources to their most valued use (more on Adam Smith page 77) Adam Smith described this phenomenon in his 1776 treatise (essay) “The Wealth of Nations,” saying it was as if an invisible hand reached out and guided resources to their most valued use (more on Adam Smith page 77)

10. Adam Smith

11. The Flow of Resources Firms produce goods and services and use the resources that enable them to generate the highest profits Firms produce goods and services and use the resources that enable them to generate the highest profits Firms often mimic other firms who are generating a higher profit Firms often mimic other firms who are generating a higher profit If a firm cannot compete with others firms in the same industry it will go out of business and possibly move to another area line of business If a firm cannot compete with others firms in the same industry it will go out of business and possibly move to another area line of business

12. McDonalds Dollar Menu Many other fast food chains copied McDonalds Many other fast food chains copied McDonalds

13. The Flow of Resources *Competitive firms produce in a manner that minimizes costs and maximizes profits* *Competitive firms produce in a manner that minimizes costs and maximizes profits* Because goods are produced in the least costly manner, consumers will more often pay a low price for the goods that they desire Because goods are produced in the least costly manner, consumers will more often pay a low price for the goods that they desire

14. The Determination of Income Consumers dictate what is produced and the search for profit defines how goods and services are produced. Consumers dictate what is produced and the search for profit defines how goods and services are produced. Now, for whom are goods and services produced? Now, for whom are goods and services produced? *Ownership of resources determines who gets what goods and services in a market system* *Ownership of resources determines who gets what goods and services in a market system* Income is obtained by selling the services of resources Income is obtained by selling the services of resources

15. The Determination of Income Labor= salaries/wages Labor= salaries/wages land= rent land= rent Capital= interest Capital= interest Entrepreneurs= profit Entrepreneurs= profit This shows us that buyers and sellers of goods and services and resource owners are linked in the economy This shows us that buyers and sellers of goods and services and resource owners are linked in the economy

16. Linkage of Sectors Household sector= buyers and resource owners Household sector= buyers and resource owners Business sector= sellers and business firms Business sector= sellers and business firms International sector= households and firms in other countries International sector= households and firms in other countries * These three sectors constitute the private sector of our economy* * These three sectors constitute the private sector of our economy*

17. Public Sector Government Consumption and Spending Government Consumption and Spending HouseholdsGovernmentFirms Factors of Prod. Payment for Factors Govt. Services Taxes Goods and Services Payment for Goods

18. Households One or more persons who occupy a unit of housing One or more persons who occupy a unit of housing A unit of housing may be a house, an apartment, even a single living room as long as it constitutes separate living quarters A unit of housing may be a house, an apartment, even a single living room as long as it constitutes separate living quarters Can consist of family members or college students sharing an apartment Can consist of family members or college students sharing an apartment Householder- person whose name the household is owned or rented under Householder- person whose name the household is owned or rented under

19. Households

20. Households There are more than 100 million households in the U.S. There are more than 100 million households in the U.S. The largest number of householders fall between the ages of 35 and 44 The largest number of householders fall between the ages of 35 and 44 Householders between the ages of 45 and 54 have the largest median income (roughly $ 60,000) Householders between the ages of 45 and 54 have the largest median income (roughly $ 60,000) Median is the middle value- half of the households make more than $60,000 and half make less Median is the middle value- half of the households make more than $60,000 and half make less

21. Size Distribution of Households

22. In the U.S. the average number of people per household is 2.2 In the U.S. the average number of people per household is 2.2 Worldwide, average household size in high-income countries (those with an average per capita income over $9,000 per year) is near that of the U.S; that of middle and low income countries is more than twice as large Worldwide, average household size in high-income countries (those with an average per capita income over $9,000 per year) is near that of the U.S; that of middle and low income countries is more than twice as large Per capita income- means how much each individual receives, in monetary terms, of the yearly income generated in the country. This is what each citizen is to receive if the yearly national income is divided equally among everyone. Per capita income- means how much each individual receives, in monetary terms, of the yearly income generated in the country. This is what each citizen is to receive if the yearly national income is divided equally among everyone.

23. Household Spending Household spending is called consumption or consumer spending Household spending is called consumption or consumer spending Spending in the household sector is the largest component of spending in the economy (roughly $6.7 trillion in 2000) Spending in the household sector is the largest component of spending in the economy (roughly $6.7 trillion in 2000) We consume housing, transportation, food, entertainment, and other goods and services We consume housing, transportation, food, entertainment, and other goods and services

24. Consumer Spending

26. Business Firms A business organization controlled by a single management A business organization controlled by a single management May be conducted at more than one location May be conducted at more than one location The terms company, enterprise, and business are used interchangeably with firm The terms company, enterprise, and business are used interchangeably with firm

27. Forms of Business Organizations Sole Proprietorship- a business owned by one person, who receives all the profits and is responsible for all the debts incurred by the business (can be a one person operation or a large enterprise with many employees) Sole Proprietorship- a business owned by one person, who receives all the profits and is responsible for all the debts incurred by the business (can be a one person operation or a large enterprise with many employees) Partnership- a business with two or more owners who share the firms profits and losses Partnership- a business with two or more owners who share the firms profits and losses

28. Forms of Business Organizations Corporation- a legal entity (body) owned by shareholders whose liability for the firm’s losses is limited to the value of stock they own Corporation- a legal entity (body) owned by shareholders whose liability for the firm’s losses is limited to the value of stock they own Multinational Business- a firm that owns and operates producing units in foreign countries (first start by selling to foreign countries and then locate subsidiaries in these countries Multinational Business- a firm that owns and operates producing units in foreign countries (first start by selling to foreign countries and then locate subsidiaries in these countries

29. Big Business Very important in the U.S. Very important in the U.S. There are many small firms, but large firms and corporations account for the greatest share of business revenue There are many small firms, but large firms and corporations account for the greatest share of business revenue Many more sole proprietorships than corporations, but corporations make 15x’s the revenue Many more sole proprietorships than corporations, but corporations make 15x’s the revenue (see handout and book statistics page 81) (see handout and book statistics page 81) Big Business is a global phenomenon Big Business is a global phenomenon

30. Worlds Ten Largest Public Corporations (2008) 1) Royal Dutch Shell (Netherlands) 1) Royal Dutch Shell (Netherlands) 2) Exxon Mobil (U.S.) 2) Exxon Mobil (U.S.) 3) Wal-Mart Stores (U.S.) 3) Wal-Mart Stores (U.S.) 4) BP= British Petroleum (Britain) 4) BP= British Petroleum (Britain) 5) Chevron (U.S.) 5) Chevron (U.S.) 6) Total (France) 6) Total (France) 7) Conoco Phillips (U.S.) 7) Conoco Phillips (U.S.) 8) ING Group (Netherlands) 8) ING Group (Netherlands) 9) Sinopec (China) 9) Sinopec (China) 10) Toyota Motor (Japan) 10) Toyota Motor (Japan) http://money.cnn.com/magazines/fortune/global500/200 9/snapshots/6388.html http://money.cnn.com/magazines/fortune/global500/200 9/snapshots/6388.html http://money.cnn.com/magazines/fortune/global500/200 9/snapshots/6388.html http://money.cnn.com/magazines/fortune/global500/200 9/snapshots/6388.html

31. Top Ten Corporations (oil)

32. Top Ten (not oil)

33. Business Spending Investment- spending by business firms on capital goods (machines, tools, buildings, etc.) that will be used in producing goods and services Investment- spending by business firms on capital goods (machines, tools, buildings, etc.) that will be used in producing goods and services Economics definition of investment is different then the everyday definition (financial transaction such a buying bonds or stocks) Economics definition of investment is different then the everyday definition (financial transaction such a buying bonds or stocks) Investment spending in 2002 reached $1,588 billion (equal to ¼ of consumption or household spending) Investment spending in 2002 reached $1,588 billion (equal to ¼ of consumption or household spending)

34. International Sector Foreign buyers and sellers have a significant impact on economic conditions in the U.S. (example, foreign exchange rates can affect the demand for U.S. goods) Foreign buyers and sellers have a significant impact on economic conditions in the U.S. (example, foreign exchange rates can affect the demand for U.S. goods) Current Exchange Rates Current Exchange Rates http://www.x-rates.com/ http://www.x-rates.com/ http://www.x-rates.com/

35. Types of Countries Industrial and Developing Industrial and Developing Developing countries greatly outnumber industrial countries Developing countries greatly outnumber industrial countries World Bank- an international organization that makes loans to developing countries World Bank- an international organization that makes loans to developing countries The World Bank groups countries according to their per capita income (income per person) The World Bank groups countries according to their per capita income (income per person)

36. Types of Countries (cont.) Low income economies (per capita income less than $755.00) heavily concentrated in Asia and Africa Low income economies (per capita income less than $755.00) heavily concentrated in Asia and Africa Middle income economies (per capita income of $756.00 to $9,265.00) Middle income economies (per capita income of $756.00 to $9,265.00) High income economies such as oil exporters or market industrial economies (per capita income $9,266.00 or higher) High income economies such as oil exporters or market industrial economies (per capita income $9,266.00 or higher) Some countries are not members of the world bank so they are not categorized Some countries are not members of the world bank so they are not categorized Page 86-87 in textbook outline global income Page 86-87 in textbook outline global income

37. “Industrial Market Economies” Page 88 shows the 23 industrial market countries as of 2003 (per capita income) Page 88 shows the 23 industrial market countries as of 2003 (per capita income) 1) Switzerland $36,970 1) Switzerland $36,970 2) Japan $35,990 2) Japan $35,990 3) Norway $35,530 3) Norway $35,530 4) United States $34,870 4) United States $34,870 5) Denmark $31,090 5) Denmark $31,090

38. “Industrial Market Economies” These countries are highly interdependent (economic conditions in one country spread to others) These countries are highly interdependent (economic conditions in one country spread to others) As a result these countries must pay close attention to each others economic policies As a result these countries must pay close attention to each others economic policies Not on the list are high income oil exporting countries like Libya, Saudi Arabia, Kuwait (World Bank considers these countries to still be developing Not on the list are high income oil exporting countries like Libya, Saudi Arabia, Kuwait (World Bank considers these countries to still be developing

39. Developing Countries U.S. imports agricultural produce and minerals from developing countries U.S. imports agricultural produce and minerals from developing countries Imports- products that a country buys from other countries Imports- products that a country buys from other countries U.S. exports many manufactured goods to these countries U.S. exports many manufactured goods to these countries Exports- products that a country sells to other countries Exports- products that a country sells to other countries

40. U.S. Imports Imports from China have grown 665 percent since 1992. Imports from Mexico have grown 343 percent over the same period. Imports from China have grown 665 percent since 1992. Imports from Mexico have grown 343 percent over the same period. The U.S. is the world's largest market for exporting countries. In 2004, it imported more than $1.3 trillion worth of merchandise. Of the total 2004 U.S. imports, half came from the four top trading partners: Canada (17 percent), China (13 percent), Mexico (11 percent), and Japan (9 percent). The U.S. is the world's largest market for exporting countries. In 2004, it imported more than $1.3 trillion worth of merchandise. Of the total 2004 U.S. imports, half came from the four top trading partners: Canada (17 percent), China (13 percent), Mexico (11 percent), and Japan (9 percent).

41. U.S. Imports

42. U.S. Exports

43. International Sector Spending U.S. activity with the rest of the world includes U.S. spending on foreign goods and foreign spending on U.S. goods U.S. activity with the rest of the world includes U.S. spending on foreign goods and foreign spending on U.S. goods As of 2003 Canada and Japan played a huge role in U.S. trade (roughly 1/3 of exports and more than 1/3 of imports) As of 2003 Canada and Japan played a huge role in U.S. trade (roughly 1/3 of exports and more than 1/3 of imports) U.S. trade with industrial countries is approximately twice as large as trade with developing countries U.S. trade with industrial countries is approximately twice as large as trade with developing countries

44. International Sector Spending Trade Surplus- the situation that exists when imports are less than exports Trade Surplus- the situation that exists when imports are less than exports Trade Deficit- the situation that exists when imports exceed exports Trade Deficit- the situation that exists when imports exceed exports Net Exports- the difference between the value of exports and the value of imports Net Exports- the difference between the value of exports and the value of imports Prior to the 1960’s the U.S. exported more than it imported, but since 1976 net exports have been negative (U.S. has been in a trade deficit) Prior to the 1960’s the U.S. exported more than it imported, but since 1976 net exports have been negative (U.S. has been in a trade deficit)

45. Linking the Sectors See page 124 circular flow diagram and/or handout See page 124 circular flow diagram and/or handout Financial Intermediaries- intuitions that accept deposits from savers and make loans to borrowers (banks, credit unions, savings and loan firms) Financial Intermediaries- intuitions that accept deposits from savers and make loans to borrowers (banks, credit unions, savings and loan firms) Circular Flow-Diagram- a model showing the flow of output and income from one sector of the economy to another Circular Flow-Diagram- a model showing the flow of output and income from one sector of the economy to another

46. HouseholdsGovernmentFirms Factors of Prod. Payment for Factors Govt. Services Taxes Goods and Services Payment for Goods Factors of Production Payment for Factors Payment for Goods and Services Goods and Services Financial Intermediaries Foreign Markets $forNetExports$forNetExports Net ExportsNet Exports SavingsInvestments

47. Capstone Unit 3 Lesson 15 People often complain, sometimes bitterly, about why some people earn more income than others. They complain that "the rich get richer“ and "the poor get poorer." They suggest that the system is unfair. It must be. How else could it be that professional golfers earn more income than professional nurses? VISUAL 1 VISUAL 2 F,F,F Some Differences in income come from investment in Human Capital VISUAL 3

48. Activity 1 Activity 1 A. A. Higher levels of formal education are associated with higher median incomes. B. ($16,736 more) C. ($669,440 more) D. People make choices regarding their occupations. These choices are influenced by several factors including natural abilities,levels of education, training, health, and interests. Businesses, to earn profits, must attract people to produce goods and services. Businesses must offer wages, salaries, and benefits sufficient to attract workers willing to work for them The wage or salary paid to a worker is a reflection of the market price for labor in that market. E. The market for celebrities is influenced by many of the same factors that influence other markets, including the laws of supply and demand. However, technological changes [in television, movies, and other medial now permit entertainers to provide millions of fans with entertainment services at relatively low prices. For a few successful celebrities, this results in large incomes. The same can be said of large, successful businesses that earn high profits by selling millions of products.)

49. Capstone Unit 3 Lesson 16 VISUAL 1 VISUAL 1 VISUAL 1 VISUAL 1 All False All False When people buy U.S. Savings Bonds with their extra income, they are making an economic investment. A. A. Personal investing means placing savings in instruments such as U.S. Savings Bonds or savings accounts, or purchasing stocks. Economic investing refers to the purchase of capital that is used to increase the production of goods and services. Then businesses buy trucks or buildings, for example, they are investing dollars they have obtained from savers.

50. True/False Results Money does not have a price. B. B. The price of money is the interest rate. Overall, it is always beneficial to save. C. Savers should weigh the expected benefits and costs of saving. There may be times when saving is not worth the sacrifice. In periods of high inflation, for example, it is expensive to save. Overall price-level changes do not relate to saving or investment decisions. D. Inflation influences the value of money over time. People should choose to save when the interest rate on savings is 3 percent and the cost of living is rising by 4.5 percent. E. False. ln such a case, inflation exceeds the return on savings, making it unwise to save.

51. True/False Results The rule of 72 refers to the amount of time it takes to save enough money to buy a1972 Corvette. F. The rule of 72 provides a method for calculating how long it takes for savings to double. The more money people save, the less money there is available for investments. G. When people save, they make more money available in the loan able funds market. This means more dollars will be available for borrowing and Lending.)

52. Value In 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. $5, Paper, Tissue There must be some interesting differences between one piece of paper and another.

53. Value Why are some pieces of paper more valuable than others? (The $5 bill is more than a piece of paper; it represents purchasing power - the ability to obtain valuable goods and services in the marketplace. It is this purchasing power that gives the $5 bill its value.) Do dollars ever lose their purchasing power? How might inflation influence the value of money? (Inflation - a sustained period of rising price levels erodes, the value of money. Inflation therefore has an important bearing on decisions about whether to save or spend.)

54. Activity 1 Activity 1 Imagine that they have a friend named Jackie who is thinking about buying a used car for $3,500. $105, $3605 $175, $3675 What do you think Jackie should do? (She should buy the car now. lf she waits, she will lose money on purchasing the car because inflation is growing faster than the interest she can earn on her savings.)

55. Part 2 Read and complete part 2 Read and complete part 2 36, 14.40,12, 7.20 36, 14.40,12, 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. Read Part 3 Read Part 3

56. Loanable funds Market A. What is the loanable funds market? (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? (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 rate] to fall.) C. How does reducing savings cause interest rates to increase? (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) VISUAL 2

57. Capstone Unit 3 Lesson 17 Creating a budget Creating a budget People who often benefit the most from a financial plan are those who believe they don’t need one. People who often benefit the most from a financial plan are those who believe they don’t need one. Main ingredients of a good financial plan have: 1. Gathering Information about goals, income and expenditures and 2. Organizing this information. Main ingredients of a good financial plan have: 1. Gathering Information about goals, income and expenditures and 2. Organizing this information.

58. Financial Planning Document Activity 1 Activity 1 Visual 1 Visual 1 Visual 1 Visual 1 Three Activities Three Activities 1. Role Play 1. Role Play 2. Revision 2. Revision 3. Your own Financial Plan 3. Your own Financial Plan

59. Role Play Develop a plan for your character. Develop a plan for your character. Add information as necessary. Add information as necessary. Income is before taxes. Income is before taxes. Tax rates vary between 15 to 36 percent. Tax rates vary between 15 to 36 percent.

60. What determines how people value things? What determines how people value things? the influence of family, friends, and religion. These influences often shape people's goals and the value judgments they make about careers, family life, other relationships, and what they do for fun How is income related to expenditure decisions? income acts as a constraint on expenditure decisions. Each students who assume the role of upper-income persons will find that they cannot have it all: choices have to be made If income is a constraint for everyone, how does one make the hard choices about how much to spend and what to spend it on? they sought to make expenditure choices that would provide them with the greatest satisfaction at the lowest cost, given the alternatives available. They may have started by planning to buy items they needed to survive; then, if they could afford to do so, they may have turned to the luxury items that are most consistent with their stated goals and lifestyle What are the pros and cons of completing a financial planning document? What are the pros and cons of completing a financial planning document? This process encourages a thoughtful weighing of expected costs and benefits. It is frustrating to realize that you can't have it all, but knowing what you value and what you want out of life makes foolish expenditures less likely.

61. Changing Events Strip Plan 2 Plan 2 Redo plan with changing event in place Redo plan with changing event in place Do you consider your change to be positive or negative? Explain how a price increase for a particular item changed your plan. When financial plans are changed to account for income or price changes, are the changes of an all-or-nothing type? Why do most people make small adjustments to their budget when a price changes?

62. Own Plan Use Current information or future Use Current information or future Complete full plan Complete full plan Changing event strip Changing event strip

63. Capstone Unit 3 Lesson 18 Credit Management Credit Management Visual 1 Reveal only Advantages and Disadvantages Visual 1 Reveal only Advantages and Disadvantages Visual 1 Visual 1 Visual 2 Visual 2 Visual 2 Visual 2 Activity 1 Activity 1 Activity 1 Activity 1

64. Case One Katie has a difficult choice to make. As is so often the case, the benefits of looking good don't come without costs. Even at 50 percent off, the skirt will cost $137.50. This translates into $62.50 coming out of Katie's savings. Remember that she is saving for college - the source, potentially, of a huge long term benefit. If Katie opens a credit-card account at the store, she will reduce her out- of-pocket expenditure to $123.75 minus $75.00, or $48.75. She would have to pay this amount out of her savings when the bill arrives - or pay s minimum payment plus an interest charge. The usual 5 percent minimum payment or $10 (whichever is larger) would mean that next month she will have a 68 cent interest charge. lf she misses the payment deadline, she will also incur a $35 late fee.

65. Case two Willie's situation would probably be familiar to many new college graduates. Being close to graduation is very much like being graduated, and few college grads believe they will fail to find employment. Walking away from the situation would certainly solve the efficiency issue for the moment, but remember that Willie expects to buy a car very soon anyway. lf he waits, he might forfeit a good deal and have to pay more later. If he buys the expensive Honda, he gains the benefits of the rebate and will have a smaller out-of-pocket cost in the long run. A major issue is whether he will get a job that pays enough to cover the new car - plus his student loans and his basic living expenses. The more expensive car's real cost is calculated by subtracting the rebate of $2,500 and the $500 discount (leaving $26,500) and adding 6 percent, or $1,590, plus an average $150 license fee. The total is $28,240. The cheaper car would cost $20,66L. Note that these figures do not include effects related to the duration of the loan selected. Real interest needs to be considered as a benefit, since inflation allows purchasers to use cheaper dollars in paying off their debts. The real interest rate for the first year of the 48-month contract is -1.1percent;for the 60- month contract it is +3.9 percent,

66. Case three With a new child, Mr. and Mrs. Jones will find it very helpful to have a washer and dryer. But the new child also will cause a reduction in income for a period of time. If Mrs. Jones goes back to work outside the home, child-care expenses will add to the financial burden. If Mr. and Mrs. Jones buy the $579 combo, their first payment will be approximately $29; after that they will pay 21 percent interest on the unpaid balance. The first payment on the $849 combo will be approximately $43, and the interest rate on the unpaid balance will be 21 percent. The extended warranty may reduce future repair costs, but that is an unknown. The silver service sounds like a nice extra, but Mr. and Mrs. Jones need to decide whether they would ever really use it.

67. Closure Visual 3 Visual 3 Visual 3 Visual 3 Look back at the recommendations they made in Activity 1. In arriving at those recommendations, did you use some or all of these guidelines? Will you be able to use the guidelines in future decisions of their own? Why or why not?