Money, Banks, and the Price of Borrowing

Civics & Economics · Economics · ages 11-14

Name ______________________ Date ____________

Lena borrows $1,000 from a bank. The loan charges 10% interest per year. If she makes no payments, how much does she owe after one year? (Answer in dollars.)
Answer: ______________
A bank raises the interest rate on savings accounts from 2% to 4%. Ben has $200 in his savings account. What happens to his savings over the next year?
- They grow faster than before
- They grow slower than before
- They stay exactly the same
- The bank takes some away
Why is trading with money easier than bartering goods directly?
- You don't need to find someone who wants exactly what you have
- Money is always worth more than the things you trade
- Barter takes longer to count than money
A bank uses savers' deposits to make loans to borrowers.
Circle one: True False
A bank pays savers 3% interest on deposits and charges borrowers 6% interest on loans. Why does the bank charge more than it pays?
- The difference pays for running the bank and is how it earns money
- Banks do not like savers
- The law says every loan must cost 6%
- Savers have to pay the bank to keep their money
If interest rates go up, what usually happens to people taking out car loans?
- Fewer people take out car loans, because monthly payments cost more
- More people take out car loans, because rates make loans free
- Nothing changes, interest rates don't affect loans
Nora puts $100 into a savings account. In the first year the bank pays 10% interest. In the second year the rate drops to 5%. How much money is in the account after two years? (Answer in dollars, cents allowed.)
Answer: ______________
Interest rates on home loans go up. What will most likely happen?
- Fewer people buy houses because loans cost more
- Everyone rushes to buy more houses
- Houses become free
- Banks stop lending money forever
Interest rates just dropped. Who is most likely pleased?
- Someone who just put a large amount of money into a savings account
- Someone about to take out a mortgage to buy a house
- A bank comparing what it pays savers to what it earns from borrowers
Which is worth more: $100 today, or $105 given to you one year from now, if savings accounts pay 10% interest per year?
- $100 today
- $105 one year from now
- They are worth exactly the same

Answer key

For grown-ups. Fold this page away before handing over the rest.

Money, Banks, and the Price of Borrowing W1-mt__aqBHw2wZM-s1

1100 · Borrowers pay interest on top of what they borrowed, so the debt grows to $1,100.
They grow faster than before · A higher interest rate means the bank pays more for the same deposit, so savings grow faster.
You don't need to find someone who wants exactly what you have · Barter only works when both people happen to want each other's stuff. Money removes that problem because everyone accepts it.
True · That is exactly how a bank connects people who have extra money with people who need to borrow it.
The difference pays for running the bank and is how it earns money · The bank stands between savers and borrowers, and the gap between the two rates is how it makes money.
Fewer people take out car loans, because monthly payments cost more · Higher interest rates make borrowing more expensive, so people take out fewer loans for big purchases like cars.
115.5 · Each year the interest is figured on the newest balance and the newest rate, so a lower second-year rate slows the growth.
Fewer people buy houses because loans cost more · Higher rates make borrowing more expensive, so big purchases like houses slow down.
Someone about to take out a mortgage to buy a house · Lower rates mean cheaper loans, so a new borrower pays less interest on a mortgage. Savers actually earn less when rates drop.
$100 today · The $100 today can be saved at 10% and becomes $110, which beats waiting for $105.