Education Resources

Content standards: Council for Economic Education Voluntary National Content Standards in Economics, Standard 20

Recession, Monetary Policy, and Me
50 minutes (100 minutes with optional activity)

Related Links Student handout "Recession, monetary policy affect students and their families" (Extra Credit fall 2009) Glossary for article

Description
Students will read an article discussing the current recession's impact on jobs, housing, credit, and investments; possible causes of the recession; and steps the Federal Reserve and other agencies have taken to stabilize the economy and financial markets. The article also discusses the financial difficulties that the recession has caused for many households. A handout provides questions for classroom discussion of these issues. An optional extension activity (which may be assigned as homework for later class discussion) has students consider how interest rates affect the cost of borrowing for a large-ticket item such as a car loan.

Materials
Each student will need

• Student handout with discussion questions
• Extra Credit article "Recession, monetary policy affect students and their families" (fall 2009 issue)
• Glossary article
• Pen or pencil
• Access to the Internet (for optional extension activity)

Procedure
Ask students what they know about the current state of the economy. If they say the economy is doing poorly, question them to find out what shaped their perceptions.

Tell students they will now read an article about the current recession, or economic downturn, and how the Federal Reserve—the U.S. central bank—and other agencies are attempting to address the problem. Explain to students that the Federal Reserve, or Fed, is the institution in our country that promotes economic growth and stability by controlling the amount of money and credit in the economy.

Give each student a copy of the Extra Credit article "Recession, monetary policy affect students and their families," the accompanying glossary, and the student handout sheet with discussion questions. Ask students to read the article and consider the questions on the handout sheet.

When students have finished reading, discuss the following questions from their handout sheet:

1. What are the characteristics of this recession in terms of employment?
   Unemployment is 9.5 percent of the workforce, almost one in ten people. The rate of unemployment has increased 4.7 percent since the recession began.

2. How do you think the high unemployment rate affects people's ability to pay their loans, such as home mortgages? What is the result of not paying a home mortgage loan?
   If homeowners lose their jobs and have not saved enough to pay their mortgage loan, they may lose their house. Tell students that this is one of the reasons it is important for individuals and families to save up to six months of expenses in the event of an emergency such as a sick relative or job loss. Wage earners should save 10 percent of their income.

3. What caused this recession?
   The buildup of excesses: a lot of available credit (money for loans), a bubble in the housing market, loose lending practices, deregulation of some financial markets, a global savings glut, a huge increase in securitization that was not widely understood, and consumers' and financial institutions' increased appetite for risk.

4. Give some examples of how the Fed is trying to mitigate the effects of the recession.
   Providing liquidity to the credit markets, extending the terms (duration) and kinds of collateral for its loans, supporting the mortgage markets by purchasing mortgage-backed securities, and working to keep longer-term interest rates down.

5. What are some signs that the actions of the Fed and other institutions are working?
   Banks' willingness to lend to each other has improved, spreads on auto loans and credit card loans have narrowed, and mortgage rates have declined.

6. How can you and your family protect yourselves from the effects of future recessions?
   Some traditional jobs may be in less demand and may be replaced by brand-new types of jobs. Students should invest in their education and work to enhance their skills so they can be competitive as the economy evolves. Households and families should strive to save six months of expenses to protect themselves from the financial effects of an emergency. Students and families can make an effort to control their spending and avoid debt, especially credit card debt.

Optional extension activity (may be assigned as homework and discussed in the next class period)
Remind students that one of the most important ways that the Federal Reserve affects their lives is by influencing interest rates, or the price borrowers pay for a loan. Ask students to choose a car or other large-ticket item that they would like to buy and find out the item's cost. Then students can use an online loan amortization schedule calculator (such as http://www.amortization-calc.com/) to determine the total amount they would pay in interest and the monthly payment and compare those outcomes under different interest rate scenarios, such as a loan at 3 percent and 5 percent.

By Sara Messina, economic and financial education specialist, Jacksonville Branch

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