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Economic Indicators and Personal Financial Literacy Katherine M. Sauer

Economic Indicators and Personal Financial Literacy Katherine M. Sauer Metropolitan State University of Denver dr.katherine.sauer@gmail.com 3 rd annual “Fiscal Fitness for You and Your Students Workshop” Colorado Jump$tart Coalition | Great-West Financial

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Economic Indicators and Personal Financial Literacy Katherine M. Sauer

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  1. Economic Indicators and Personal Financial Literacy Katherine M. Sauer Metropolitan State University of Denver dr.katherine.sauer@gmail.com 3rd annual “Fiscal Fitness for You and Your Students Workshop” Colorado Jump$tart Coalition | Great-West Financial January 24th, 2013 – Denver Federal Reserve Bank

  2. Rental Income Interest & Dividends Wages & Salaries Proprietor's Income Transfer Payments Income Taxes Borrowing Pay Back Debt Allocation Options Spending Saving & Investing Giving

  3. State of the Economy Income Interest & Dividends Financial Markets Saving & Investing Interest Rates Borrowing

  4. Economic Growth Is economic activity increasing or decreasing? How much?

  5. Inflation Is the cost of living increasing or decreasing? By how much?

  6. Yearly Inflation Rate, 2001 to 2012

  7. Unemployment Rate Of the people who want jobs, what percent don’t have one?

  8. * *Dec. 2012 rate

  9. S&P 500 • stock market index • used as a measure of the general level of stock prices • includes the stock prices of 500 publicly traded companies • representative of US industry

  10. S&P 500 January 2004 – January 2013

  11. Dow Jones Industrial Average • “the Dow” • stock market index • 30, large, publicly traded firms • representative of US industry

  12. Dow Jones Industrial Average January 2004 – January 2013

  13. Nasdaq Composite • National Association of Securities Dealers Automated Quotations • stock market index • all the firms traded on the NASDAQ stock exchange • over 3,000 firms • technology companies and growth companies

  14. Bull Market vs Bear Market • Bull Market = upward trend in stock market, optimism about continued gains • Bear Market = downward trend in stock market, pessimism about future

  15. Bond Market • certificate of indebtedness • terms are fixed in advance but price varies with the market • can be sold at face value (par), a discount, or a premium

  16. US Government Savings Bond Issue price: $18.75 Issue date: May 1978 Maturity date: May 2008 Interest over 30 years: $87.92 Treasurydirect.gov

  17. Treasury Securities • T-bills (mature in less than a year) • T-notes (mature in 2 to 10 years) • T-bonds (mature in 20 to 30 years)

  18. Financial Intermediaries • match those with excess financial capital to those who wish to borrow money • interest rate • market for loanable funds • expected inflation • credit risk

  19. The Market for Loanable Funds More Savings More Funds Available Cheaper to Borrow More Borrowing Less Funds Available Dearer to Borrow

  20. Expected Inflation • lenders factor inflation into interest rates 3% rate of return + 5% expected inflation = 8% interest rate With higher-than-expected inflation (10%): rate of return on the loan = 8% - 10% = -2%

  21. Credit Risk • lenders factor the riskiness of a loan into the interest rate • demand higher rates of return on riskier loans 7% rate of return + 5% expected inflation = 12% interest rate

  22. The Federal Reserve • monetary policy • recessions lower rates increase econ activity • inflationary times raise rates decrease activity

  23. Interest Rate Terms • Discount Rate = interest rate charged by the Fed to banks who need to borrow money • Federal Funds Rate = interest rate charged by banks to each other • Prime Rate = interest rate charged by banks to their best customers

  24. The Big Mac Index • compares foreign currency value versus the US dollar • January 2012 Big Mac Prices US: $4.20 Russia: 81 rubles • exchange rate: 1 dollar to 31.8 rubles • 81rubles x 1 dollar • 31.8rubles • = $2.55 • $2.55 < $4.20 … ruble should appreciate • January 2013 exchange rate: 1 dollar to 30.2 rubles • ruble appreciated vs dollar

  25. Men’s Underwear Index • Alan Greenspan • to men, underwear is a necessity, not luxury • sales are consistent, except in down economic times when purchases are delayed

  26. The Lipstick Index • in a weak economy, cut back on non-essentials but find “little luxuries” to spend on • recent recession: nail polish, boxed hair dye

  27. Economic Indicators Workshop March 2nd www.CCEE.net Katherine M. Sauer Metropolitan State University of Denver dr.katherine.sauer@gmail.com 3rd annual “Fiscal Fitness for You and Your Students Workshop” Colorado Jump$tart Coalition | Great-West Financial January 24th, 2013 – Denver Federal Reserve Bank

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