The financial security that comes with wealth accumulation requires an understanding of the time value of money. Students begin this module with a lesson on opportunity cost, the most fundamental consideration in any personal financial decision. Students move on to a lesson on interest where they will recognize the importance of interest in sheltering them from the higher cost of living they are certain to experience in later years. The increase in their future costs will be due to inflation, the third subject they will encounter in this program. Students will use their knowledge of opportunity cost, interest and inflation to determine the future value of investments they may make as young adults and the present value of a sum of money they hope to have at a later date.
Content Standard 1: Scarcity
Grade 8 Benchmarks
2. Making good choices should involve trading off the expected value or one opportunity against the expected value of its best alternative.
3. The choices people make have both present and future consequences.
4. The evaluation of choices and opportunity costs is subjective such evaluations differ across individuals and societies.
Grade 12 Benchmarks
1. Choices made by individuals, firms, or government officials often have long run unintended consequences that can partially or entirely offset or supplement the initial effects of the decision.
Content Standard 2: Decision Making
Grade 8 Benchmark
1. To determine the best level of consumption of a product, people must compare the additional benefits with the additional costs of consuming a little more or a little less.
4. Many people have a tendency to be impatient, choosing immediate consumption over saving for the future.
Grade 12 Benchmark
3. To compare marginal benefits with marginal costs that are realized at different times, benefits and costs must be adjusted to reflect their values at the time a decision is made about them. The adjustment reflects returns to investment compounded over time.
Content Standard 11: Money and Inflation
Grade 4 Benchmark
5. Inflation is an increase in most prices; deflation is a crease in most prices.
Grade 8 Benchmark
4. Inflation reduces the value of money.
Content Standard 12: Interest Rates
Grade 8 Benchmark
1. An interest rate is the price of money that is borrowed or saved.
Grade 12 Benchmarks
2. Higher real interest rates increase the rewards for saving and make borrowing more expensive.
3. Real interest rates normally are positive because people must be compensated for deferring the use of resources from the present into the future.
4. Riskier loans command higher interest rates than safer loans because of the greater chance of default on the repayment of a risky loan.
7. Expectations of increased inflation may lead to higher interest rates.
8. Future values can be converted to present values by discounting the future value based on the rate of interest.
