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USA National Standards for Concept "Interest"

NATIONAL STANDARD 12 - INTEREST RATES: Students will understand that: Interest rates, adjusted for inflation, rise and fall to balance the amount saved with the amount borrowed, which affects the allocation of scarce resources between present and future uses.

Students will be able to use this knowledge to: Explain situations in which they pay or receive interest, and explain how they would react to changes in interest rates if they were making or receiving interest payments.

Interest rates influence the borrowing and saving of business investors, consumers, and government agencies. Most people are unfamiliar with interest rates until they wish to borrow money for a major purchase such as an automobile, college education, or a house. When they enter the market for credit they encounter an unfamiliar price (the interest rate) offered by an unfamiliar business (a financial institution). It is necessary for students to understand that interest rates are determined by market forces that balance savings and borrowing. For many people, interest rates can represent significant financial costs and significant financial benefits over a lifetime.

It is also important for students to understand the incentive effects of interest rates. Interest payments compensate savers for postponing current consumption; they compensate lenders for the risk that borrowers might default on their loans; and they cover the cost of expected inflation over the term of the loan.

You can find additional online lessons on US Standard 12 from the Council for Economic Education Website.

Financial Literacy 3 - SAVING: Saving is the part of income that people choose to set aside for future uses. People save for different reasons during the course of their lives. People make different choices about how they save and how much they save. Time, interest rates, and inflation affect the value of savings.

At the 4th grade level, the primary focus is for students to understand the concept of saving. Students should know how people save money, where people can save money, and why people save money, as well as the concept of interest. At the 8th grade level, the focus turns to the role that financial institutions play as intermediaries between savers and borrowers as well as the role government agencies such as the Federal Deposit Insurance Corporation (FDIC) play in protecting savings deposits. The role of markets in determining interest rates is introduced. Finally, the mathematics of saving is covered, including the power of compound interest. All of this is framed around the choices people make about how much to save. At the 12th grade level, more complex concepts are introduced, such as real versus nominal interest rates, present versus future value, financial regulators, the factors determining the value of a person’s savings over time, automatic savings plans, “rainy-day” funds, and saving for retirement.