Lesson 5

Knowing About the Economy

Lesson Overview:

Lesson 5 discusses: 1) the Federal Reserve; 2) economic trends; 3) types of economies; 4) taxes; and 5) the "New Economy."

 

Learning Objectives:

The students will:

  • Define "the economy."
  • Describe the purpose and structure of the Federal Reserve System.
  • Tell how the Fed achieves its economic goals.
  • Explain how inflation and deflation impact citizens.
  • Compare and contrast market, command and mixed economies.
  • Name types of taxes as well as their sources and uses.
  • Summarize how to best prepare for their future role in the "New Economy."

 

Content Standards Addressed:

Common Core State Standards

National Standards

 

Vocabulary:

  • Command economy - economy controlled by the government.
  • Deflation - economic condition featuring an overall steady decrease in prices.
  • Economy - financial connections between consumers, producers and a government.
  • Federal Reserve ("the Fed") - central bank of the United States.
  • Inflation - economic condition featuring an overall steady increase in prices.
  • Market economy (capitalism) - economy featuring freedom of both producers and consumers.
  • Mixed economy - economy featuring freedom and the support and help of government.
  • Tax - money collected by a government from its citizens and used for various purposes.

 

Review:

To reinforce Lesson 4, review these points:

  • Better decisions are made when people follow a logical, step-by-step process.
  • Peer pressure can be positive or negative. Negative peer pressure can be overcome through techniques like humor and making excuses based on truth.
  • Advertising provides product information, but its main purpose is to persuade consumers to buy.
  • Advertising contains both facts and opinions, so it's important to tell the difference between them.
  • Stores use techniques to encourage unplanned, or impulse, buying.

Part 1: What is the Economy?

Materials Needed:

Before beginning the lesson, it may be helpful to review the economic concepts discussed in previous lessons:

  • Scarcity and opportunity cost (trade-off) from Lesson 1.
  • Supply and demand from Lesson 2.
  • Cost and benefit from Lesson 4.
The economy of a country consists of the financial connections between:
  • Producers (individuals, groups or businesses that make goods or provide services).
  • Consumers (individuals, groups or businesses that buy the goods and use the services).
  • Government.

(See Level 1, Lesson 5, "Spending My Money" for more on producers and consumers.)

These financial connections hinge on the country's supply of money, which is controlled by its central bank. The duties of central banks include:

  • Supplying paper and coin money. (In the U.S., paper money is printed by the U.S. Bureau of Engraving and Printing in Washington, D.C., and Fort Worth, Texas. Coin money is produced by the Treasury Department at the U.S. Mints in Philadelphia and Denver.)
  • Overseeing credit, computer-based financial transactions (EFT) and banking systems.
  • Helping and protecting consumers by enforcing laws, providing resources, handling complaints, etc.

The United States did not always have a central bank. A central bank was established in 1792 and 1816 but each lasted just 20 years before being dissolved. Without a central bank, our country's finances were unstable.

In October 1907, uneasy bank customers, fearing their money wasn't really secure, withdrew millions of dollars from New York City banks, leading to bank failures and almost bankrupting the city. John Pierpont Morgan saved the day by gathering together the city's bank presidents and raising $25 million in minutes, enough to keep Wall Street afloat and prevent financial disaster. The Panic of 1907 convinced Americans a central bank was truly needed, and in 1914 the Federal Reserve, the "Fed, was established.

 

Reproducible: The Federal Reserve System

Make copies of the reproducible and have students complete the blanks as you review the structure of the Federal Reserve System using the following outline. (The worksheet answers are found in bold, underlined text within the outline.) 

  • The United States' central bank, the Federal Reserve, must file reports and answers to Congress, but its daily decisions do not need the approval of the president or Congress. The Federal Reserve System has been carefully planned so our nation's money isn't controlled by a few powerful people.
  • The Fed's highest authority is the Board of Governors. Governors are appointed by the president of the United States. Their terms end in different years and are 14 years in length to ensure they are not overly influenced by a single presidential administration. They represent different regions of the country and various businesses and interests.
  • There are 12 Federal Reserve districts. Each of the Reserve Banks has a board of directors who answers to the Board of Governors. Only a few of these directors can be associated with banks; the rest must represent farmers, nonprofit groups, business owners and other occupations.
  • Twenty-four other cities have branches of the Reserve Banks, and each branch has its own board of directors.

Each Reserve Bank offers the banks in its region the types of services a bank provides its customers; for example, it supplies paper and coin money and accepts deposits.

  • Every bank that is a member of the Federal Reserve System must keep a portion of its money reserved for the Fed's use. This money earns good interest. Member banks fall into two categories:

- All national banks, which are chartered (approved as a business) by the federal government.

- Some state banks, chartered by a state government.

Activity:

Invite students to research the closest Reserve Bank or branch. When was it established? Some have student-friendly visitor centers. If time and funds allow, your group may enjoy taking a tour of the facility.

The Fed's goals are to:

  • Keep prices stable enough that consumers and businesses are confident in their financial futures.
  • Keep unemployment levels stable.
  • Ensure consumers are supplied with goods and services they need and want.

Achieving all these goals can be a challenge! To perform this delicate balancing act, the Fed meets about every six to seven weeks to look at:

 

  • The financial condition of the different regions of our country.
  • How the economy as a whole has been affected recently.
  • How experts say the economy will behave in the next few years.

How do these experts know whether or not our country is in good shape financially? One way they keep tabs on the American economy is by looking at the Consumer Price Index. (CPI).

Each month, the U.S. Bureau of Labor Statistics contacts professional offices, stores and many other types of business to get the prices of about 80,000 items. These goods and services include things like gasoline, clothing, haircuts, food and pet care products. These items are put together in a variety of consumer "market baskets." The costs of these CPI market baskets are then compared month to month.

Another way experts measure the health of America's economy is by looking at the annual GDP, or Gross Domestic Product, from one year to the next. Our country's GDP is the total, in dollars, of all consumer, business and government spending and the value of America's exports (goods sold to other countries).

Using these figures and other available information, the Fed decides whether to increase or decrease the supply of money flowing into the economy. To do this, it buys or sells government securities. When citizens buy securities, they are basically loaning money to our federal government and, in return, they receive interest on their money.

When the Fed buys back these securities from citizens who have purchased them, the money they've loaned to the government will be returned to them with interest. When this money is deposited into their bank accounts, it increases the amount of money that banks have to lend to consumers and loan interest rates go down. This means consumers can get credit more easily.

If consumers can get credit more easily, they'll spend more money. The demand for goods and services rises as a result. To keep up with the demand, producers may expand their businesses, hire more employees and/or increase the pay of those who currently work for them. When these financial conditions exist, the economy is growing and considered to be "healthy."

When the Fed sellsthe securities to citizens, they withdraw money from their bank accounts to pay for them. Then banks don't have as much money to lend and loan interest rates go up. If consumers have to pay more interest to borrow money, they won't want to buy as much and prices will drop. Businesses won't need as many workers to make or sell goods and services. When these financial conditions exist, the economy is said to be declining or "weak."

If the economy continues to grow (or decline), it can lead to more serious financial conditions. Businesses may not keep up with the demand for goods and services and many prices may go up. This is called inflation. During periods of inflation, there may be less unemployment, but consumers will pay higher prices for what they need. (Low unemployment sounds good, but too low of a level may mean businesses may have to pay higher wages to keep their employees.) Consumers whose incomes do not increase in proportion to the higher prices - for example, retired workers - may be forced to cut their spending in some areas in order to afford what they need to live. For example, they may not eat out as often or delay buying a new car.

As a weak economy worsens, consumers may feel anxious and worried about the future. Will they lose their jobs? Will they have enough money for what they need? If this business slowdown, or deflation, lasts for more than six months, experts call the economic trend a recession. If a recession is very bad and continues for a long period of time, it is known as a depression. During hard times, businesses that help consumers save money or distract them from their financial troubles may actually do well. These include entertainment-related companies, discount stores and repair shops.

 

Reproducible: Growing vs. Declining Economies

What do we consumers see in a growing or declining economy? Make copies of the reproducible and discuss these economic conditions. The answers are found here.

 

Activity: Interview

The very oldest adults in your community will easily remember the hard times produced by the Great Depression, which began on "Black Tuesday," Oct. 29, 1929, and ended in December 1941, when the U.S. entered World War II. During this time period, the GDP fell drastically and one out of four people was unemployed. (Some cities saw unemployment figures of 80-90 percent.)

Invite someone who lived through the Great Depression to speak with your students. Use these interview questions as starters:

  • How did your family earn money to live during the Great Depression?
  • Since money was tight, what did your family do for fun during the Depression?
  • What do your remember most about living during this time?
  • What did you learn about saving or spending money during hard times?
  • Share a funny or interesting story from this time period.

As an alternative, have the group interview someone who can speak about:

  • The stock market crash on "Black Monday," Oct. 19, 1987, which showed a $500 billion dollar loss and the greatest one-day percentage drop in history: 508.32 points or 22.6 percent.
  • The short- and long-term economic impact of Sept. 11, 2001.
  •  
 
When the price of crude oil rises it affects all consumers, directly and indirectly. (Crude oil is oil in its natural state, before it's purified.) Make copies of the reproducible and discuss the far-reaching effects of increased oil prices. The answers are found here
 
As a follow-up to the worksheet, ask students to write a short paragraph about the effect of an increase in crude oil prices from the vantage point of one of the following:
  • A teenaged fast-food worker.
  • A college student working a summer job at a local amusement park.
  • A middle school student who had hoped to move to a new house soon. 
 

Part 2: Types of Economies

The United States guarantees freedom for all its citizens and has a type of a government called a constitutional democracy. A democracy is ruled the citizens of the country or those they elect, and a constitution describes the principles and laws by which it is governed.

The freedoms we in America enjoy are necessary for a market economy. In a market economy, producers and consumers are free to make their own choices. Producers of goods and services are free to own their property and equipment. They are free to set their own prices. They are free to advertise when and how much they want. Because of the freedoms they enjoy, producers are motivated to use their time, talents and money, and work hard. A large variety of goods and services are available in a market economy. In a market economy (also known as capitalism), consumers are free to work whenever and wherever they want in order to afford their needs and wants. They are free to buy as much as they please. The are limited only by what they can afford. (Lesson 2 discussed supply and demand. If the demand for a good or service is high, it may be in short supply and therefore expensive.)

Very few countries now have command economies. In a command economy, a few people in government decide what goods the country will make and what services it will provide. Producers are not free to choose what to make, how to make them or how many to make. They have little motivation to work hard or well, so production is often lower in a command economy. Consumers in a command economy have few choices because there is little variety of goods and services.

A person's standard of living is a measure of his or her lifestyle, and includes things like level of income, how long they can expect to live, and types of goods (like houses and cars) and services (like health care and education) they can afford. Standards of living relate to the goods and services a country produces and are usually high in countries with market economies and lower in those with command economies.

Countries that have struggling economies can try to raise their citizens' standards of living by: 1) offering more economic freedoms to producers and consumers; and 2) investing in - putting money toward - things that will help producers make more goods and services and consumers afford more goods and services.

Nations like the United States that support and encourage businesses to produce more and help and protect consumers while providing economic freedoms are said to have a mixed economy. To provide these services and benefits, the federal, state and local governments collect taxes:

  • Federal and state income taxes (from worker and business earnings).
  • State and local sales taxes (from the sales of goods and services).
  • Property taxes (from those who own real estate).
  • Inheritance or estate taxes (from those who have received money or possessions from someone who has passed away).

 

With this tax money, a government with a mixed economy helps both consumers and producers by:

  • Repairing and maintaining roads.
  • Offering free public education and loans for high education.
  • Defending the nation and individual states.
  • Protecting the environment.
  • Setting minimum safety standards for drivers, workers, businesses, etc.
  • Processing and delivering mail.
  • Providing electricity and natural gas.
  • Conducting elections.
  • Providing income for disabled, older or unemployed citizens.

 

 

Government agencies are usually funded by tax money. Some well-known ones are:

  • Consumer Product Safety Commission (CPSC) - creates safety standards, researches hazardous products and publishes safety information.
  • Federal Communications Commission (FCC) - makes sure programs are appropriate for all ages of viewers and listeners.
  • Federal Trade Commission (FTC) - guards against consumer fraud and prevents businesses from establishing unfair prices.
  • Food and Drug Administration (FDA) - protects Americans' health by ensuring the safety and wholesomeness of drugs, foods, cosmetics and other products.
  • U.S. Dept. of Housing and Urban Development/Federal Housing Administration (HUD/FHA) - helps consumers who might not otherwise be able to afford to buy or keep a home.

Reproducible: Economy Crossword

Review the concepts and vocabulary from this section by making copies of the reproducible. Assign as an independent activity, or complete as a group. The answers are found here.

 

Part 3: Preparing For the "New Economy"

Hundreds of years ago, a revolution took place. In the early 1700s, new technologies began transforming the way goods were made and used. Many that were once produced by hand, one at a time, at a cost that was out of reach for commoners, became mass-produced and affordable to most. The Industrial Revolution also radically improved methods of transportation, with the harnessing of steam power. In the early 1800s, steamboats and steam trains carried goods. All in all, these changes eventually made possible the lifestyle many Americans now enjoy.

Discuss:

  • What ordinary items once made by hand are now mass produced in factories? (Possible answers include shoes, clothes, soap, toys, bread, cheese and other foods, etc.)

If you have access to the Internet, consider viewing online videos showing how a good (for example, bread) is made by hand and how it is made in a factory.

  • What are advantages and disadvantages of each?

Our world is now experiencing rapid change as the result of affordable technology. Computers and the Internet have revolutionized the ways we communicate and learn. The "Information Revolution" has also radically improved ways of doing business and how goods and services are produced, sold and transported. Producers are more efficient and this has in many cases lowered costs to consumers.

These changes are good, but technology does have a downside: the loss of millions of American jobs since the mid-1990s. Improved production has eliminated the need for some types of workers. When President Bill Clinton signed the Electronic Signature in Global and National Commerce Act (the E-Signature Law) in 2000, a simple click of a mouse button became as binding as a consumer's signature in ink on a paper contract. E-commerce (the sale of goods and services over the Internet) suddenly could compete on equal ground with traditional businesses. The Internet has truly created a global economy, and business owners in other countries produce goods that compete with American businesses.

What future impact will the Information Revolution have on today's kids?

In 10 years, when the students in your group enter the workforce or pick a college major, the world will have changed that much more. How can they possibly prepare for the world of work when it isn't clear what that working world will look like?

One thing is clear. Current trends among American students must change:

  • One in six high school students drops out before graduation (in some states it's one in four).
  • They consistently score lower in math, science and reading than students from many other countries.

Experts say today's students will need to be highly skilled in the core subjects of reading, writing, math and science, just like those from previous generations. But because they'll be interacting with individuals from other countries, and those in business will be competing in a global economy, they'll need to become proficient in world languages like Spanish and Chinese. They'll also require a solid background in geography, history, economics, the environment and government/civics in order to understand other countries' cultures, history, unique issues and concerns.​

 

Modern Woodmen's Patriotic Civics Program

 

Adapting to quickly changing circumstances won't be easy, but experts say students can help prepare for that time by developing skills in the "4 Cs":

  • Critical thinking.
  • Communication.
  • Collaboration.
  • Creativity.

 

Critical thinking

Kids will need lots of practice in making decisions and solving real-life problems. Learning how to locate and evaluate information will be essential.

Critical Thinking Activities:

  • Provide regular opportunities for students to problem-solve and make decisions using the six-step method outlined in Lesson 4. These might include deciding on a field trip, choosing how to spend an unexpected block of free time, resolving a classroom issue, etc.
  • Take advantage of the school newspaper program, if available. Read and discuss editorials of interest and national, state and local issues and problems. 
  • Play games like Tribond and Scattergories which offer practice in drawing analogies and categorizing.

Communication

While young people are often very savvy in communication technology, they may lack in critical areas of comprehension and interpretation. Statistics show children ages 8 to 18 watch three to four hours of TV a day, but spend just 25 minutes a day reading. Decoding information, whether in paper or electronic form, is a key element in communication. Speaking and writing skills will also be essential.

Communication Activities:

  • Give each student an everyday object. Have them do research on the item and then present the information as they pitch the audience's need for the product.
  • Encourage communication by using icebreakers to fill short periods of downtime during the school day.
  • If your school doesn't have a foreign language program, try to integrate words and phrases in Spanish, Chinese or another world language into your school day. Provide opportunities for students who speak another language at home to teach vocabulary to the group.

 

Collaboration

A global economy will require not only the ability to communicate with diverse groups of people, but the willingness to understand, accept and work together with them to reach common goals. Flexibility and power sharing are essential qualities.

 

 

Collaboration Activities:

  • Incorporate multicultural experiences into group gatherings when possible. Taste-test ethnic foods. Celebrate special days/seasons from other cultures.
  • Be mindful of, openly challenge and invite dialogue regarding ethnic/cultural stereotypes and misconceptions.
  • Use team-building activities to promote trust and leadership qualities. Many ideas are available from online resources.

Creativity

In a competitive, changing world, it will be necessary for producers to constantly develop new ideas. Fostering creativity will help students address future issues and problems in innovative ways.

Creativity Activities:

  • Divide the group into teams. Display an ordinary object. Give them a minute or two to brainstorm unusual uses for the item. Or, as an alternative activity, imagine the team was mistakenly shipped a large quantity of the item (for example, a million cotton balls). How would they make use of them all?
  • Use mind mapping for maximum results when brainstorming or to help sort out ideas for a presentation or writing assignment.

To mind map, place an idea or topic (for example, "Los Angeles") in a central circle. Draw branches to represent related thoughts or subtopics, for example, "Hollywood stars," "Pacific Ocean," "Dodgers baseball," etc. Continue adding sub-branches; for example, under "Pacific Ocean," one could write "surfers," "beaches," etc.

  • Encourage students to incorporate technology to make their group presentations more creative. They might consider filming a video, staging a game show, building a slide show, etc.

Reproducible: Mind Mapping

Make copies of the reproducible and complete as a whole group if your students aren't familiar with the concept.

 

Modern Woodmen's School Speech Contest

  • Providing researching, writing and public speaking experiences to students in Grades 5-8 for more than 65 years.
  • Online resources for the contest organizer include preparation tips, student reproducibles and more.
  • Awards for participants, gifts for judges and timer.

Financial Literacy Program magnets

Wrap up the unit by distributing the Financial Literacy magnets to the students. They'll enjoy constructing financially-themed phrases and sentences from the words. The business card-sized magnet is handy for affixing a photo, paper or memo to a locker, refrigerator or other metal surface.

 

Special warning: Children under the age of 6 should avoid playing with small magnets. If magnets are swallowed, serious injuries and/or death can occur.