Transcript Teaching PFL and Eco in the Economics Classroom!!!

STAAR Lessons for HS US
History and Economics
Laura Ewing
Texas Council on Economic Education
[email protected]
www.economicstexas.org smartertexas.org
P: 713.655.1650 F: 713.655.1655
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STAAR Lessons for HS US Economics
PowerPoint Adapted From A Presentation By Jean Walker
West Texas Center for Economic Education
College of Business
West Texas A&M University
Canyon, Texas
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How To Really Be A Millionaire
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The Economic Way of Thinking

What do $1 trillion, 94% and $25,000 have in
common?
14
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And the statistics say? Page 1

Why don’t people enroll in college?
What are the issues? Pages 2 to 4

What are the solutions? Pages 5 to 7
15

Review pages 1 to 5: what is interesting?

Review one segment of pages 6 to 15. Have a
one sentence summary/explanation as to the
importance of the section.

Please visit the appendix for additional
information
16
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What prices was paid?
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What are three things you learned from the
activity?

What happened to the value of the $???
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Common elements of financial crises worldwide throughout history
 Lesson 1 – compares 1907 & 2007 crises
 Lesson 2 – compares 2007 crisis with: (emphasis on reading eco. Data)
▪
▪
▪
▪
▪
Recession of 2001
Recession of 1990-1991
Recession of 1981-82
Recession of 1973-75
Great Depression 1929-38
(Dot-Com bubble burst, Enron, Worldcom, et.)
(oil price shock due to Gulf War)
(tight money to control inflation)
(stagflation; OPEC oil embargo spiked oil prices)
(stock market crash; falling demand)
 Lesson 3 – a historical look at five bubbles & panics:
▪
▪
▪
▪
▪
Tulipmania in the Dutch Republic – 1630’s
The South Sea Bubble – Great Britain 1711-1721
The Roaring 20’s Stock Bubble – 1920’s
Japan’s Bubble Economy – 1985-90
The Dot-Com Bubble – 1990’s
 Lesson 4 – comparison to Lost Decade in Japan
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. . . presents an organizing
framework for putting into
context the media attention
that has been paid to the
2008 financial crisis . . .
This publication, in it’s entirety, is
included on the Virtual Economics
CD, version 4.
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Specific focus on the recent financial crisis
 Lesson 5 – focuses on monetary policy
▪ Students role play as Federal Reserve Board governors
 Lesson 6 – examines the housing bubble
▪ Heavy use of supply/demand graphs
▪ Securitization simulation for students
 Lesson 7 – helps students learn terminology about modern financial markets
▪ Quiz bowl game on terminology
 Lesson 8 – interaction between modern financial markets and monetary and
fiscal policies
▪ Students take part in mock trial
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Introduce the 2007 Financial Crisis with
Activity 3 – Characters in the Financial Crisis
 Announcer
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Joe, who needs money for his kid’s college tuition
Bruce, the mortgage banker/mortgage broker
Mortimer, the old-time banker
Uncle Sam
Wall Street banker
Investment salesman
Village treasurer of Narvik, Norway
Bruce’s boss
The World – (all together)
(Nine characters plus “the world”)
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Have students complete
Activity 1 as you progress
through the slides of visual 1.
If you have not taught
about the recent financial
crisis, you will find
information in other lessons
to assist with explanations.
FYI:
The slides for Activity 1 are
available in powerpoint on
www.councilforeconed.org/financialcrises
22
THE PANIC OF 1907
THE FINANCIAL CRISIS OF
2007
DEVASTATION
SAN FRANCISCO EARTHQUAKE

Shortly after 5 a.m. on April
18, a 7.8-magnitude quake,
unleashed offshore, shook
the city for just less than a
minute.
UNCONTROLLABLE BLAZE
80% OF THE CITY DESTROYED

Though the damage from
the quake was severe, the
subsequent fires from
broken gas lines caused the
vast majority of the
destruction.
3,000 PEOPLE DIED
THE FIRES RAGED FOR FOUR
DAYS
INFLEXIBLE CURRENCY
TOUGH BALANCING ACT
Between 1870 and 1914,
many countries adhered
to a gold standard.
 This strictly tied national
money supplies to gold
stocks.
 Currency was redeemed
for gold at a fixed
exchange rate.

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
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At the end of 1905, nearly 50% of the fire insurance in San Francisco was
underwritten by British firms.
The earthquake gave rise to a massive outflow of funds—of gold—from
London.
The magnitude of the resulting capital outflows in late summer and early
autumn 1906 forced the Bank of England to undertake defensive measures
to maintain its desired level of reserves.
The central bank responded by raising its discount rate 2.5% in 1906.
Actions by the Bank of England attracted gold imports and sharply reduced
the flow of gold to the United States.
Interest rates rose and by May 1907, the United States had fallen into one
of the shortest, but most severe, recessions in American history.
At the beginning of the
century, the nation
was brimming with a
great amount of
optimism.
Here is a list of familiar
companies founded
between 1900 and
1905.
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Eastman Kodak
Firestone Tire
Ford Motors
Harley-Davidson
Hershey
U.S. Steel
J.C. Penney
Pepsi-Cola
Texaco
Sylvania Electric

In October 1907 two brothers,
Otto and F. Augustus Heinze,
attempted to manipulate the
stock of a copper company.

They planned to corner the
market in the copper
company's shares by buying
aggressively in hopes they
could later force short sellers
to buy them at high prices.

The plan did not have
sufficient backing and failed.


News a number of
prominent New York
bankers were involved in
the failed scheme began a
crisis of confidence among
depositors.
As additional institutions
were implicated, queues
formed outside numerous
banks as people
desperately sought their
savings.
Trust companies
were a financial
innovation of the
1890s. They had
many functions
similar to state and
national banks but
were much less
regulated.
KNICKERBOCKER TRUST COMPANY
They were able to hold
a wide array of assets
and were not required
to hold reserves
against deposits.
 They earned a higher
rate of return on
investments and paid
out higher rates, but,
to do this, they had to
be highly leveraged.
 They took more risks
than traditional banks.

Illustration from Harper's Weekly December 20, 1913 by Walter J.
Enright
A NEW YORK CITY BANK RUN IN NOVEMBER 1907
The runs on
deposits that
sparked the Panic
of 1907 were at
two of the largest
New York City
trust companies:
Knickerbocker
Trust and Trust
Company of
America.
The crash and panic of 1907 had a dramatic effect on the health of the
American and worldwide economies. In the United States:

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Commodity prices fell 21 %.
Industrial production fell more than in any other crisis in American history
to that point.
The dollar volume of bankruptcies declared in November was up 47 % from
the previous year.
The value of all listed stocks in the U.S. fell 37 %.
In October and November 1907, 25 banks and 17 trust companies failed.
Thousands of depositors lost their life savings.
Gross earnings by railroads fell by 6 % in December and production fell
11%.
Wholesale prices fell 5 %.
Imports shrank 26 %.
In a few short months, unemployment rose from 2.8 % to 8%.
Immigration reached a peak of 1.2 million in 1907 but fell to around 750,000
by 1909.
NEITHER ELECTED NOR
APPOINTED, HE FELT IT WAS HIS
TIME TO ACT
J.P. MORGAN



In the absence of a strong
federal regulatory structure or
any safety nets, the response to
this crisis had to be delivered by
a private citizen, J.P. Morgan, the
world’s most powerful banker.
He used all of his influence to
convince fellow titans of industry
to pool their resources and
salvage the nation.
The Panic subsided after six
weeks.
SPECULATION IN OFF-STREET
MARKETS
Bucket shops were blamed for
fueling the speculation in 1907.
They enabled people to speculate
on the value of a stock without
having to purchase the stock
itself.
The actual order to purchase went
in the “bucket.” Beginning in
1909, New York banned bucket
shops and other states followed.
A BUCKET SHOP IN 1907
THE WORLD MADE HUGE INVESTMENTS IN
THE U.S. HOUSING MARKET
……….AND LOST!!

By ignoring risk, remaining
irrationally optimistic, and forgoing
transparency through an array of
fantastically complicated
investment vehicles, the world’s
financial markets were extremely
dependent on housing prices.

The underlying assumptions were
(1) that housing prices never fall and
(2) homeowners almost always pay
their mortgages.
DURING AND AFTER THE MILD
RECESSION OF 2001, THE FED LOWERS
INTEREST RATES
FORMER FED CHAIRMAN ALAN
GREENSPAN
STRONGLY PROMOTED
HOMEOWNERSHIP
FORMER PRESIDENT GEORGE
BUSH

“We can put light where there’s
darkness, and hope where
there’s despondency in this
country. And part of it is
working together as a nation to
encourage folks to own their
own home” –President Bush,
October 15, 2002.
HIGHLY COMPLEX FORMS OF
FINANCING
The momentum behind the
expansion of
homeownership led the
government to reduce
regulations and capital
requirements for making
loans.
 This led to a dizzying
number of innovative ways
to get less-qualified
borrowers a mortgage and
seemed to reduce risk for
the lender.
 Mortgages could be
bundled and sold around
the world as securities.

THIS WAS TOO TEMPTING FOR
THE FINANCIAL INSTUTIONS
TRUSTED AGENCIES FAILED TO
WARN INVESTORS

Mortgage-backed securities were
constructed of mortgages of
differing quality levels.

The obligations of solid and subprime borrowers were mixed in a
manner that made it very difficult
for experts to calculate risk.

The assumption that U.S. housing
prices would continue to rise and
incentives to provide good ratings
led agencies to rate these
securities as AAA, lowering
investors’ concerns.
RISK-RATING AGENCIES
THE PERFECT STORM
WHAT WERE WE THINKING?








Homeownership peaks in early 2005
at 70% of households.
The Fed raises interest rates.
Home prices fall.
Higher adjustable interest rates
increase payments for borrowers.
Borrowers default in waves.
Dozens of subprime lenders file for
bankruptcy.
Mortgage-backed securities lose
value as investors question their
contents.
Financial institutions struggle to find
buyers for the MBSs.
“FINANCIAL
WEAPONS OF
MASS
DESTRUCTION”
Financial institutions could
purchase credit default
swaps.
A CDS is a private
insurance contract that
paid off if the investment
failed.
One did not actually have
to own the investment to
collect on the insurance.
These promises were
unregulated, and the
sellers did not have to set
aside money to pay for
losses.






Bank failures: 183 (2%) 12/072/10 (No deposits lost)
Unemployment rate: 10.1%
(10/09)
Economic decline: -4.1% (4Q
2007-2Q 2009)
Biggest drop in DJIA: -53.8%
(12/07-3/09)
Emergency spending and tax
reduction programs: 2.5% of
GDP in 2008 and in 2009
Aggressive increase in
monetary stimulus by the Fed
THE FINANCIAL CRISIS OF 2007-2009
6.7 million jobs lost in
2008 and 2009
Capital investment levels
lowest in 50 years
Domestic demand declines
11 consecutive quarters
Industrial production
down worldwide: Japan
31%, South Korea 26% ,
Russia 16% , Brazil 15% ,
Italy 14%, Germany 12%
The federal government
unleashed a series of
remedies in an attempt
to limit the contagion.
Massive sums of bank
reserves were created to
ease fears.
In the process, the
taxpayers took over or
funded several familiar
financial and
nonfinancial companies.
This time the government
bails out the economy and
business leaders and bankers
are criticized.
2007
1907







Highly complex and linked financial
system
Strong growth in the economy
starting in 1900
Many people and institutions highly
leveraged
Innovative form of finance: trust
companies
Stock market setting all-time highs
A limited role for government
Markets swing from great optimism
to great pessimism







Global interdependent financial
system
Vibrant economic recovery after
recession in 2001
Lenders willing to take more risk in
making loans
Unregulated financial institutions:
hedge funds
Companies reporting record
earnings
Absence of many safety buffers
Dow 14,164 to 6,500 in 16 months
2007
1907






J.P. Morgan, a private citizen,
orchestrated the bailout
The Panic lasted for six weeks, though
the economy didn’t return to prePanic levels until 1909
Many banks were closed and many
depositors lost their savings
The nation was on the gold standard
and the supply of money was fixed
The San Francisco earthquake was a
catalyst for the Panic
The climate toward business was
hostile prior to crisis






The Federal Reserve and Treasury
Department organize the reaction
The event has been unfurling for more
than five years
Many banks closed and folded into
healthier banks, but depositors did not
lose any of their savings
The nation uses Federal Reserve
notes, creating a flexible money
supply
Hurricane Katrina was generally
benign as a catalyst
The climate toward business was
friendly prior to crisis

Community Reinvestment Act – signed in 1977 by Jimmy Carter
 Induced lenders to enter underserved or “red-lined” areas.
 1993 -1995, President Clinton asked regulators to reform the CRA to
"deal with the problems of the inner city and distressed rural
communities”--availability of credit should not depend on where a
person lives.
 The Interstate Banking and Branching Efficiency Act of 1994, which
repealed restrictions on interstate banking, used CRA ratings as a
consideration when determining whether to allow interstate branches
 George Bush, as early as 2002, pushed home ownership—”an
ownership nation.”
 In 2007 Ben Bernanke suggested further increasing the presence of
Fannie Mae and Freddie Mac in the affordable housing market to help
banks fulfill their CRA obligations by providing them with more
opportunities to securitize CRA-related loans.
50

The rise in housing prices represented a bubble.

A price bubble is a situation where increases in price are not justified by
fundamental factors affecting supply or demand, and therefore not
sustainable.

A price bubble is often caused by contagion, which is prices increasing
because people observe them going up and think they will continue to go
up.
 At one point, people who couldn’t pay their mortgages were taking out home
equity lines of credit and using the cash to pay the mortgages! They could do
this because equity in homes rose as home prices rose, and “personal bankers”
were pushing home equity lines of credit.

This causes people to purchase houses with the expectation that they
will be able to sell them for a higher price in a relatively short time.

It was a speculative bubble.

When the bubble burst in 2006, house prices tumbled.
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52
U.S. Homeownership rate:
2000
2004
2010
67.4%
69.0%
66.9%
53

Positives:





Spreads risk. Not all eggs in one basket. Diversified.
Made a liquid investment from an illiquid investment.
Allowed smaller investors to invest in housing.
Meant more money flowed into mortgage markets.
Negatives:
 Reduced the incentive for investors to be concerned about the
creditworthiness of borrowers.
 Reduced the incentive for banks and mortgage brokers to be
concerned with creditworthiness.
 Exported the risk around the world because the MBS securities
were stamped AAA by the ratings agencies and sold worldwide.
54

Before
teaching this
lesson, make
sure students
understand
the concept of
business
cycles:




Expansion
Recession
Peaks
Troughs
55

Growth of real GDP measures health of economy
 Generally, we say two quarters of declining GDP is a recession, but
economists at the National Bureau of Economic Research actually
make the determination
 GDP = C + I + G + Net Exports
▪ Consumer spending is 60-70% of U.S. GDP
▪ Investment spending, government spending, and net exports make up the rest

Contributing factors to growth:
 Level and rate of change of technology
 Investment in tools, machines, computers, infrastructure, and building
 Skill and experience levels of the economy’s labor
The main activity in this lesson asks students to work in groups to analyze 6 of the 14
recessions between 1929 and 2007. Before working, they should understand
business cycles and how GDP and Unemployment affect or are affected by
recessions.
56

The Great Depression (19291938)
 Duration: 1929-1933 (43 months)





& 1937-1938 (13 months)
Began with falling demand for
durables and investment goods
Stock market crashed in Oct. 1929
By March 1933, 25% of the
workforce was out of work.
More than 9,000 bank failures
between 1929 and 1933
Fed did not act as the lender of last
resort, even raising interest rates in
late 1931
57

The Recession of 1973-1975
 Duration – Nov. 1973 to March




Remember Gerald Ford and the WIN
buttons – Whip Inflation Now!
1975 (16 months)
Peak unemployment - 9.0%
(May, 1975)
Inflation rate - 11%
Economic stagflation
Causes
▪ 1973 Oil Crisis – OPEC’s oil
embargo caused “oil price shock”,
which slowed production of goods
and services
▪ Vietnam War
58

The Recession of 1981-1982
 Duration – July 1981 to Nov.




1982 (16 months)
Peak unemployment - 10.8%
(Nov., 1982)
Inflation rate – 8.9%
Business bankruptcies up 50%
Farmers especially hard hit
▪ Ag exports declined
▪ Crop prices fell
▪ Interest rates rose
 Causes
President Reagan was in office and is often
credit with “breaking the back of inflation.”
▪ Iranian Revolution increased oil
prices and new Iranian regime
exported oil inconsistently
▪ FED adopted tight money policy
(high interest rates) to break the
back of inflation
59

The Recession of 1990-1991
 Duration – July 1990 to March
1991 (8 months)
 Peak unemployment - 7.8%
(June, 1992)
 Although brief, the recession
caused George H.W. Bush to
be defeated by Bill Clinton
 Causes
▪ 1990 oil price shock because of
the Gulf War
▪ Ongoing concerns of savings and
loan crisis
▪ After a long expansion, inflation
began to increase so the FED
increased interest rates
▪ Debt accumulated in the 1980’s
was a concern
60

The Recession of 2001
 Duration – March 2001 to
November 2001 (8
months)
 Peak unemployment 6.3% (June, 2003)
 NASDAQ returns
▪ 2000 (40%)
▪ 2001 (21%)
 Causes
Since most dot.com stocks were traded on
the NASDAQ, the stock graph tells the story
of the bubble collapse that was a cause of the
recession.
▪ Collapse of speculative
dot.com bubble
▪ Uncertainty after attacks of
9-11-2001
▪ Accounting scandals and
fraud at Enron, Worldcom,
etc.
61

The Financial Crisis of 200709
 Duration – December 2007 to




June 2009 (18 months)
Peak unemployment - 10.1%
(October, 2009)
GDP Decline peak to trough:
(4.1%)
Bank failures (2007 – 2009): 168
Causes
▪ Subprime mortgage crisis led to
housing market collapse
▪ Collapse of MBS brought down
Bear Stearns, Fannie Mae, Freddie
Mac, Lehman Brothers, and AIG
▪ Investment banks used too much
leverage
▪ All remaining investment banks
turned into commercial banks
▪ Government bailout of financial
services and auto industries
62
▪ Tulipmania in the Dutch Republic – 1630’s
▪ The South Sea Bubble – Great Britain 1711-1721
▪ The Roaring 20’s Stock Bubble – 1920’s
▪ Japan’s Bubble Economy – 1985-90
▪ The Dot-Com Bubble – 1990’s

http://www.library.hbs.edu/hc/historicalreturns/fb/movie.html
63

Hyman Minsky’s phases of a bubble:

Displacement
▪

Boom
▪

A few insiders begin to take profits and get out, and price increases begin to level out.
Panic
▪

People take more risk as more credit is offered. High profits repeat the cycle, and at some point rational decision-making
succumbs to manic behavior.
Profit-taking
▪

Rapid rise in prices of a financial or physical asset as investors and speculators earn profits
Euphoria
▪

Crisis begins with an outside shock to the system—war, new invention, political event, etc.
The failure of a large institution, the realization of a swindle, or an increase in the supply of the asset bring everyone back
to their senses. People scramble to sell as the price falls.
Bailout (not a part of Minsky’s description)
▪
▪
▪
▪
A central bank may expand the money supply to salvage essential financial institutions.
Rationale: don’t make the whole economy pay for the actions of a few.
Negative externality: the anticipation of a bailout may indirectly add to the problem because people may take greater
risks if they know there is a safety net—this is known as a moral hazard.
John Kenneth Galbraith suggests investors have a short financial memory and investors have a tendency to attribute
greater intelligence to individuals who have higher income or control more wealth.
64
65
“The four most expensive words in the
English language are, this time it’s
different.”
attributed to Sir John Templeton
66
L
E
S
S
O
N
4
67

Strong demand for Japanese exports
 Large amounts of foreign currency flowed to Japan as a result





Low interest rates
Speculative surge in Japanese stock market
Speculative surge in Japanese real estate
Boom in stocks and real estate were supported by debt
Japanese govt. feared an asset bubble and decided to
“pop the bubble” by increasing interest rates
 It had been easy for the Japanese to borrow money to invest in
stocks or real estate because rates had been low
 Collapse in prices led to a credit crisis—banks suffered massive
losses as defaults on loans rose
68

Govt. injected massive amount of money into
banks—was controversial
 Government said banks were “too big to fail”
 This led to “zombie banks”

The problems in real estate and stock spilled
over into the rest of the economy
 Housing prices peaked in 1991


The whole economy fell into recession
A series of graphs in Activity 2 compares the
2007 recession in the U.S. to Japan’s lost decade
69
By 1995, the Japanese had spent nearly $2.1 trillion
on public projects to stimulate the economy.
 In 1994-95 the economy began to rebound, but it
was a false recovery.

 The stimulus plans had created huge budget deficits.
 Some argued the govt. stopped spending too soon; others
argued reducing taxes would have been better.
 The govt. increased taxes to reduce the deficits, and by
1997, growth was again at zero.
 Between 1994 and 2009, prices declined (deflation) in all
but one year.
 Growth recovered in 2003-04.
70
Through opinion pieces in the Financial Times and
Washington Post, Larry Summers, former economic
adviser to Barack Obama and Treasury secretary
under Bill Clinton’s presidency, expressed concern
that the United States is heading for a “lost decade”
similar to Japan’s lost decade in the 1990s.
 This country has already experienced five years of
economic growth under 1% annually, and that’s half
way to a decade.

71
72
What happened?
Why?
In 5 years, how far have we come?
73
74
75
76
The Case-Schiller Price
Index represents the real
price of housing
throughout the country,
so it is inflation-adjusted.
The index equals 100 for
the price of housing in
1980.
Prices peaked in 2006.
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
In the fall of 2007, the “subprime crisis” was a
concern, and we began to realize the real estate
bubble had burst. (Home prices peaked in 2006.)

However, the stock market peaked, and GDP in the
2nd & 3rd quarters of 2007 was especially strong.

Generally, people deeply involved in finance began
to talk about problems in the credit markets and a
lack of liquidity.
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December, 2007
 Dec. 11 – Fed begins lending to banks for longer than overnight. (By
October 2008, many banks are on Fed life support.)
January
 Jan. 12 – Bank of America agrees to buy Countrywide Financial, the
largest mortgage lender, and casualty of the mortgage-default crisis.
February
 Feb. 8 – Congress approves a $168 billion economic stimulus plan.
 Feb. 29 – Dollar hits record low against euro.
March
 March 17 – Bear Stearns, which traded at a share price of nearly $90
per share in January, sells itself to J.P. Morgan Chase for $2 per
share, with the Fed providing special financing. Mortgage-backed
securities took them down.
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
April
 April 18, 19 – Merrill Lynch posts a $1.96 billion loss; Citigroup posts a $5.1
billion quarterly loss.
 April 30 – Countrywide Financial posts a $893 million loss.

May
 May 9 – AIG posts $7.8 billion quarterly loss.

June
 June 9 – Average price of gasoline in U.S. first hits $4 a gallon.
 June 21 – Bond insurers MBIA and Ambac lose AAA ratings from Moody’s.

July
 July 12 – Regulators seize IndyMac bank.
 July 14 – Treasury and Fed place Fannie Mae and Freddie Mac under govt.
control.
 July 31 – Pres. Bush signs a housing-rescue bill.
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
August
 August 7 – Freddie Mac posts an $821 million loss; AIG reports a $5.4 billion loss.

September – Wall Street Journal calls Sept. 14 – 21, “The Week That Wall Street
Died”
 Sept. 7 – Govt. seizes Fannie and Freddie; Treasury replaces CEOs and buys $1 billion
of preferred shares in each.
 Sept. 14 – Merrill Lynch sells itself to Bank of America .
 Sept. 15 – Lehman Brothers files for bankruptcy. Fed and Treasury choose to let
Lehman fail. (In hindsight, probably a disastrous decision.)
 Sept. 16 – Banks stop lending to each other.
 Sept. 17 - Govt. seizes control of AIG, makes $85 billion loan and receives warrants in
exchange.
 Sept 21 – Fed converts the last two major investment banks, Morgan Stanley and
Goldman Sachs into traditional bank-holding companies.
 Sept. 24 – Goldman Sachs gets $5 billion investment from Warren Buffett.
 Sept. 26 – Feds seize Washington Mutual and sell it to J.P. Morgan Chase—largest
bank failure in U.S. history.
 Sept. 30 – Citigroup agrees to acquire Wachovia, and Wells Fargo makes higher bid.
Congress passes the bailout bill.
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
October
 Oct. 4 - President Bush signs $700 billion bailout bill.
 Oct. 8 – Fed says it will lend directly to U.S. corporations for the first time since the
Great Depression.
 Oct. 9 – World Central Banks coordinate lowering of short-term rates.
 Dow down 14% in October, worst month in % terms in 10 years.

November
 Nov. 10 – Govt. scraps $123 billion deal with AIG and replaces it with a $150 billion
package on better terms.
 Govt. injects $20 billion into Citigroup and guarantees $300 billion of its troubled
assets.

December
 Dec. 9 – On this date, only McDonald’s and Walmart in the Dow have higher stock




prices that this date last year.
Dec. 12 – Fund advisor Bernie Madoff is arrested by federal agents in a $50 billion Ponzi
scheme.
Dec. 17 – Fed funds rate cut to 0 - .25%.
Dec. 17 – Goldman Sachs posts $2.12 billion loss, first since going public in 1999.
Dec. 20 – White House agrees to lend GM and Chrysler $17.4 billion.
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Sample of Bankruptcy filings in 2008:
 Sharper Image
 Lillian Vernon
 Aloha Airgroup, ATA Airlines, Skybus Airlines,
Frontier Airlines
 Linens ‘N Things
 Tropicana Entertainment (casino operator)
 Circuit City
 Pilgrim’s Pride (chicken processor)
 Tribune (newspaper publisher)
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One of the very few beneficiaries of the Recession
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Unintended consequence of low rates since 2009: when interest rates are low,
corresponding investment yields are low and investors move to riskier assets trying
to find yield.
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If a presidential election were held tomorrow, what
would be three issues of concern for you that would
impact your vote?
1.
2.
3.
Ask a person who is at least 18 years of age the following question:
Please indicate the three issues that are most important to you as you
decide who will get your vote in a U. S. presidential election.
1.
2.
3.
Due Date; ________________________________________________
1.
What are the common answers?
2. What do you think about the answers?
3. How many are economic answers?
Economic Indicators
Unemployment Rate
Inflation rate
Growth rate in per
capita GDP
Statistics Based on
Indicators
Misery Index
Visual
8.1rate in real GDP
Growth
What do the indicators indicate about the
economy?
Unemployment rate: the percentage of people in the
labor force who are unemployed.
2. Inflation rate: The percentage increase in the overall
price level.
3. Real GDP: the value of all final goods and services
produced in a country in a year, expressed in terms of
constant dollars.
1.
1.
Misery Index: The sum of the unemployment rate
and the inflation rate.
2. Real Per Capita GDP Growth Rate: The percentage
change in real GDP per person
Think, Pair, Share
1. 1. What do you see on the chart?
2. 2. What year since 1957 has the unemployment
rate been the highest?
3. 3. What year had the highest inflation rate?
4. What year had the highest Misery Index?
Did the incumbent win?
Did the “in office” party win?
Predict who you think will win based on the data on
Activity 8.2.
Write two or more rules that demonstrated how to
apply the data
Share your rules and evaluate them.
Review the “rules” on 8.2 and 8.3.
Which of these rules serve as a strong predictor?
Which ones do not?
Do economics play a role in
presidential elections?
Do you believe the data we have studied shows that
economic conditions impact presidential
elections?
Is it fair to blame or give credit to the incumbent ?
Describe how the free
enterprise system works
Market Price: Changes in Supply and Demand
•How do changes in demand affect market price?
•How does the market price guide what producers or
suppliers produce?
•Why must costs be subtracted from revenues to
determine profits?
•How can certain events cause costs to change, which
can affect profits?
What is meant by demand?
2. What are three things you demand
economically?
3. How much will you pay for them?
4. What determines if you demand/buy them?
1.
We will divide into factories with 4 to 6 workers
in each factory.
2. Choose a production manager.
3. Choose an accountant
1.
There will be 3 rounds of 5 minutes each.
2. You will produce any amount, but at least one of
the apple, hammer, shirt and cup/saucer in 2
inch dimensions.
3. Each product must have 2 colors.
1.
1.
2.
3.
4.
Each product must have 2 colors.
You may only use your hands – no capital.
You may specialize.
Produce at least one of each but as many as
possible.
1.
2.
3.
4.
Each product must have 2 colors.
You may only use your hands – no capital.
You may specialize.
Produce at least one of each but as many as
possible.
Count the quantity produced of each product.
2. Record the quantities on the “Revenues Worksheet”
3. We will do a class total.
4. We will draw a demand card.
5. We will determine prices and factory earnings.
1.
Supply, Demand and Market Price Chart
Goods
Supplied by
Class
Resulting
Market Price
With NO
Change in
Demand
Resulting
Market Price
with
Decrease in
Demand
Resulting
Market Price
with Increase
in Demand
0-8
$10
$8
$13
9-12
$7
$5
$10
13-16
$5
$3
$7
17-20
$3.50
$2
$4
Over 20
$2
$1
$3
Tally your round one results
2. Plan your production strategy for round 2.
3. The production manager has the final
authority on what to produce.
1.
1.
2.
3.
4.
Each product must have 2 colors.
You may only use your hands – no capital.
You may specialize.
Produce at least one of each but as many as
possible.
Count the quantity produced of each product.
2. Record the quantities on the “Revenues Worksheet.
3. We will do a class total.
4. We will draw a demand card.
5. We will determine prices and factory earnings.
1.
Supply, Demand and Market Price Chart
Goods
Supplied by
Class
Resulting
Market Price
With NO
Change in
Demand
Resulting
Market Price
with
Decrease in
Demand
Resulting
Market Price
with Increase
in Demand
0-8
$10
$8
$13
9-12
$7
$5
$10
13-16
$5
$3
$7
17-20
$3.50
$2
$4
Over 20
$2
$1
$3
What patterns do you see in the Supply,
Demand, and Market Price Chart?
2. In a market, what two things are needed for a
price to be determined?
3. What caused price to change?
1.
4. How did price influence your
production decisions?
5.
How did other groups
influence your strategy and
plans?
•How do changes in demand and supply affect
•market price?
•How does market price help producers determine what
to produce?
1. What trends do you see ?
2. What are three things you have learned about
how the market or free enterprise system
operates?
3. What concepts and TEKS would this activity
teach?
President
Texas Council on Economic Education
www.economicstexas.org
[email protected]
713-655-1650