Matildaville
M A T I L D AV I L L E
Matildaville
Table of Contents
PROBLEM STATEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
PLACEMENT IN CURRICULUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
CONCEPTS TAUGHT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
OBJECTIVES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
CONTENT STANDARDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
TIME REQUIRED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
LESSON DESCRIPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
RESOURCE MATERIALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
THE SEQUENCE OF THE UNIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
PROCEDURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
entry point. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
framing of the problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
knowledge inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
the problem log . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
research and resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
teachable moments, dialogues and background information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
exit from the problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
wrap-up and debriefing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
DO’S AND DON’TS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
APPENDIX I: ENTRY DOCUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
APPENDIX II: BACKGROUND INFORMATION FOR BENCHMARK LESSONS . . . . . . . . . . . . . . . . . . . . . . 23
APPENDIX III: CONCEPT DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
APPENDIX IV: RESOURCE MATERIALS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
APPENDIX V: ASSESSMENT RUBRIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
APPENDIX VI: TEST BANK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
© 2002 Buck Institute for Education
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The Buck Institute for Education
The Buck Institute for Education (BIE) is a research and development organization
working to make schools and classrooms more effective through the use of problem
and project based instruction. Founded in 1987, we receive permanent funding from
the Leonard and Beryl Buck Trust, and funding for specific projects foundations,
schools and school districts, state educational agencies and the Federal Government.
Our Work
BIE creates curriculum materials, trains teachers in their use, and conducts and
disseminates research. Current programs target high school social science. BIE has
developed seven research-proven, standards-centered, Problem Based Economics
units. These units and a corresponding training program are now available from BIE
and several National Training Sites located at National Council on Economic
Education Centers. Over the next 5 years, we will provide teachers with additional
problem based units for high school government/civics, world history, geography,
world cultures, and US history.
BIE also provides training in the more general application of project based instructional
approaches, and has published the well-received Project Based Learning Handbook
used by educators across the U.S. and in several other countries.
BIE curricular materials are developed in partnership with teachers and university
educators, and are extensively pilot-tested and evaluated. When appropriate, they
integrate computer technology to simplify program implementation and multiply
program impact.
Copyright © 2002 by the Buck Institute for Education, 18 Commercial Blvd., Novato,
CA 94949
All rights reserved. For permission to reproduce any part of this publication, please
contact the Buck Institute for Education, (415) 883-0122.
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© 2002 Buck Institute for Education
M A T I L D AV I L L E
Matildaville
em
Probelment
Stat
How can we, as economic research and policy analysts,
create an investment strategy for the property willed by
Ms. Grey, so that Matildaville can pay its bills today,
recover its financial losses, and invest in meeting the
City’s economic needs?
▲ Introduction
Using the problem based learning approach, students will explore the tradeoffs that exist between
the revenues and investments made today for revenues that are generated in the future. As a
result, they will understand the relationship between investment and growth.
▲ Placement in Curriculum
This unit is designed to teach students about the relationship between investment and growth.
Prior to undertaking this problem, students should be familiar with the concepts already learned
in Running in Place, The Great Awakening, The High School Food Court, and The President’s
Dilemma. A complete listing of content standards and concepts associated with each unit can be
found in the Table in Appendix I of the Introduction. Please refer to this table to determine the
concepts that students should be familiar with before undertaking this problem.
▲ Concepts Taught
The curriculum was designed to teach the
following concepts:
(see definitions, Appendix III)
Costs (Direct and Indirect)
■ Growth
■ Income
■ Interest Rates (Nominal and Real)
■ Investment (Public and Private)
■ Multiplier Effect
■ Opportunity Costs
■ Productivity
■ Public Debt
■ Resources
■ Scarcity
■ Tradeoffs
■ Uncertainty
■
Teachers can also demonstrate the following
concepts using this lesson:
Bonds
■ Capital
■ Crowding Out
■ Depreciation
■ Financial Capital
■ Gross Domestic Product
■ Human Capital
■ Labor
■ Land
■ Present Value
■ Rate of Return
■ Rent
■ Subsidy
■ Tax
■ Time Value of Money
■ Wages
■
© 2002 Buck Institute for Education
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▲ Objectives
Students will:
■ Understand that investments are made
today in order to generate income in the
future
■
Understand that investments mean
trading off income today for income in
the future
■
Be able to describe the role that interest
rates play in investment
■
Understand the relationship between
income (or revenue) and productivity
■
Learn that investments can be made in a
variety of resources (land, labor and capital)
■
Be able to distinguish between public and
private investments
■
Define the unit concepts
■
Demonstrate an understanding of key concepts
▲ Content Standards
A city, society or individual is capable of producing some level of economic activity with its
current level of resources (land, labor, capital, and entrepreneurship). These resources can be used
to enjoy the income from economic activity today or can be invested to increase both productivity
and the capacity for income from economic activity in the future. This content, which is central to
Matildaville, addresses the following Voluntary National Content Standards in Economics:
Standard
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Economic Concept
Scarcity
Opportunity Cost
Market Systems (allocation of goods & services)
Economic Incentives (prices, wages, profits, taxes, etc.)
Free Trade & Voluntary Exchange
Specialization & Free Trade
Market Economies
Supply & Demand
Effects of Competition
Economic Institutions
Money
Interest Rates
Income & Productivity
Entrepreneurship
Investment
Public Policy Alternatives
Public Policy Costs
Gross Domestic Product
Unemployment & Inflation
Fiscal & Monetary Policy
✔
✔
✱
✔
✔
✔
✱
✱
✱
Note: Standards are based upon the Voluntary National Content Standards in Economics, which were developed by the National Council
on Economic Education in partnership with the National Association of Economic Educators, the Foundation for Teaching Economics,
and the American Economic Association’s Committee on Economic Education.
✔ = a standard that is met with this curriculum
✱ = a standard that could be met with this curriculum
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© 2002 Buck Institute for Education
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▲ Time Required
1 week (5 days)
▲ Lesson Description
In this lesson students will explore the relationship between investment and economic growth.
Students work as teams of economic research and policy analysts for the City of Matildaville. They
are asked to select entities to develop on property that was bequeathed to the City. The list from
which students select entities contains a variety of choices that will give the City different levels of
revenue and costs generated today and revenue and costs generated in the future. Initially,
students are asked to choose entities based on a list of considerations, only some of which are
economic. As the problem evolves, students are forced to focus their criteria for selection more
narrowly around economic concerns. Each team of economic research and policy analysts is asked
to write a press release that describes the team’s investment strategy for Matildaville. The press
release must include a defense of the potential of their strategy for economic growth.
▲ Resource Materials
Resources are distributed to the students
at different points in the problem and are
discussed in the Research and Resources
portion of this manual. See the Sequence of
the Unit for one example.
Resource Materials Include:
■
Memo from Fred Sully
■
List of potential entities for development
(second memo from Fred Sully)
■
Criteria for evaluating entities
■
Memo from Mayor Victor Tharpe
■
Case Studies in Public Financing
■
Class economics textbook
© 2002 Buck Institute for Education
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▲ The Sequence of the Unit
Because problem based learning is grounded in students’ constructing knowledge from real-world
applications, the sequence of learning will differ in each class. As a result, it is virtually impossible
to describe the exact unfolding of this problem even though it has been tested on
several occasions. What follows is an example of the sequence of the problem
during one class. We have used this particular sequence as an example in our
Procedures section. The phrases highlighted below are cross-referenced in boxes
crossfor easier detection.
referencing
box
■ Discuss the first memo from Fred Sully with the whole class
■
Develop the initial problem statement with the whole class
■
Develop the initial list of know and need to know with the whole class
■
Have students make initial problem log entry
■
Discuss the list of entities with the whole class (the second memo from Fred Sully)
■
Optional: benchmark lesson on multipliers
■
Revise the list of know and need to know with the whole class
■
Have the class as a whole fill in the table on entities’ characteristics
■
Revise problem statement with the whole class
■
Have students make second problem log entry
■
Discuss memo from Mayor Victor Tharpe with the whole class
■
Optional: undertake a benchmark lesson on investment, growth, & interest rates
■
Revise the list of know and need to know with the whole class
■
Assign case studies for background reading
■
Have students make final problem log entry
■
Form students into economic research and policy analyst groups
■
Finalize problem statement with the whole class
■
Introduce benchmark information at “teachable moments”
■
Have students in their policy analyst groups write a press release that describes their strategy
for investing Ms. Grey’s land and justifies their choices
■
Undertake a benchmark lesson on press release
■
Use rubric (Appendix V) to evaluate written assignment
■
Wrap-up and debrief with the whole class
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© 2002 Buck Institute for Education
M A T I L D AV I L L E
▲ Procedure
Entry Point
At the outset, students receive a copy of a memo from Fred Sully, the Director of
Matildaville’s Community Economic Development Agency. This memo explicitly
tells students that they are to select the entities to be developed on the property
memo from
Fred Sully
that Matilda Grey bequeathed to the City. The students are economic research
and policy analysts for the City. They have few constraints in selecting entities.
Because the entry document does not focus exclusively on economic
considerations, students are free to choose entities based on a very general set of guidelines at this
point in the problem. This initial focus on noneconomic considerations is intentional. If students
are allowed to select entities without focusing exclusively on economic concerns, the emphasis on
economics will become readily apparent once the City faces a financial crisis.
➤ Potential Hurdle: Be sure that students do not ignore the economic considerations in early
discussions. Eventually, their selection of entities will be based solely on economics.
SEE ENTRY DOCUMENT, APPENDIX I
Framing of the Problem
Once the entry document has been discussed, students draft a tentative problem
statement. Students should be prompted to start this process by filling in specific
information in the form of a general problem statement:
How can we, as ?, do ?, so that ?
initial
problem
statement
The initial problem statement may be far from the problem statement that we presented at the
beginning of this lesson. This is expected. It is hoped that the problem statement will evolve as
students gain more insight and knowledge of the problem and its underlying issues. Remember,
the problem is intentionally ill-defined so students must grapple with economic issues and
concepts. This continual struggle builds knowledge. The initial statement may look something like:
How can we, as economic planners, develop a written report selecting entities,
so that Ms. Grey’s legacy is remembered and community image and welfare
are maintained?
Note: Should we now try to integrate economics into this problem statement? This is not critical at
this point, but if the class can get there, go with it.
Remember, for now, it is fine to keep the problem statement ill-defined. The problem statement
will become more refined as the lesson unfolds.
© 2002 Buck Institute for Education
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Knowledge Inventory (Know/Need to Know)
After students read the memo from Fred Sully and construct the initial problem statement, they
must assess what they know in order to answer the question posed in the problem statement. This
can be done as a class by identifying all of the information that the entry document provides. The
know/need to know inventory will differ for each class because students are struggling to identify
the knowledge that they have and to define the body of knowledge that they do not have.
As part of this process, students should be coached to identify information that
they need to know to provide a solution to the problem statement. Without a
doubt, students will suggest things that they believe they need to know that, in
reality, they do not need to know. Now is not the time to filter these questions out
of the process. Rather, allow students to see their irrelevance once additional
information is discovered.
initial know/
need to
know
Below is an example of the type of items that might appear on the initial
know/need to know list. Remember that every class will produce a different list and that every idea
should be put on the board. Sometimes the seemingly strange ideas that come from a know/need to
know discussion result in some of the more creative approaches to the problem.
Examples of Initial Know/Need to Know
What do we know?
■
■
■
■
■
■
■
■
■
■
8
Ms. Grey died and left us 96 acres
Each entity will be in full capacity in 6
months
City population is about 250,000
We want the City to be thriving and wellrounded
Land cannot be sold but can be left
undeveloped
Fred Sully is our boss
We don’t have to worry about the
environmental impact of development on
parking, or traffic
Reginald Banks is the City’s Treasurer
City has lots of money
We are economic research and policy
analysts
© 2002 Buck Institute for Education
■
■
■
■
■
■
■
■
■
We can choose any combination of
entities
Wealthy, middle class and working class
want different things
No entities can be added
Ms. Grey was interested in the
community’s development of arts, leisure,
education, music, & theatre
Land overlaps central business district
Land does not need to produce revenue
for the City
Land use must reflect Ms. Grey’s interests
Must consider current cash received and
paid out and investments
Environmental impact report done
M A T I L D AV I L L E
What do we need to know?
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
What is an entity?
What is an economic research and policy
analyst?
How big is an acre?
What is a thriving and well-rounded
community?
Who makes the final decision?
What is a complement of entities?
How many acres does each entity use?
Who is in the agency?
Who are we reporting to?
What are the entities?
What is the land like?
What is the City’s planning?
Is there any money for development?
Who will manage the entities?
What is investment?
What goes into the report (format, criteria,
pages, and visuals)?
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
What are the costs for each entity?
What is the revenue from each entity?
What is the current urban layout? What
things already exist?
What is the Mayor’s office?
Is the community willing to be taxed?
Will the City need to expand?
What are the concerns of business?
Are there any special interest groups?
What are the topographic conditions of the
land?
What are the demographics of the
community?
How far is the closest hospital?
What is best for the community?
Did Ms. Grey give us any money?
What are the profits from each entity?
Which state is the City in?
What is the natural rate of unemployment?
At this point do not ask about solutions because this might negate or offset information gathering,
which is the most important part of the process.
The Problem Log
Throughout the problem, each student will keep a problem log that helps the
initial
student and teacher follow the construction of knowledge. The teacher should
problem log
entry
check the log periodically to ensure that students stay focused on the problem.
Because students initially are not asked to act like economists, the first log should
be checked to ensure that the economic considerations have been seeded into their thinking.
The problem log can be introduced after the initial problem statement has been developed and
after the class does the initial know/need to know series. At this point, the students should be
asked to start their problem log by brainstorming what they believe are the major issues.
➤ Potential Question to Ask: What information would you use to decide whether an entity
has economic value for the City?
Research and Resources
ALL RESOURCES ARE LOCATED IN APPENDIX IV
The first resource given to the students is the second memo from Fred Sully that
contains a list and detailed description of each entity that could be developed on
Matilda H. Grey’s property. Because there is a great deal of information about
each entity in its description, it is best to revisit the problem statement and the
know/need to know after the list has been discussed.
list of
entities
© 2002 Buck Institute for Education
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M A T I L D AV I L L E
The list provides several vital pieces of information that students will ultimately use in selecting
entities. First, it seeds the concepts that students will use in economic decision making. Second, it
provides a description of each entity. Third, it provides a synopsis of benefits (pros) and costs
(cons) that are associated with each entity. This information ultimately allows the students to
weigh the tradeoffs between cash today and investments in the future. Finally, it provides the exact
acreage that each entity will consume.
One of the major economic benefits of some entities is the multiplier effect
(simplified to be a domino effect on the Criteria Table). Because students are not
yet focused on the economic aspects of the problem, it is essential that they be
coached to see that a relatively small change in investment spending can trigger a
much larger change in the economic activity in the City through the multiplier. A
benchmark lesson could be undertaken if necessary (Appendix II). This would
help ensure that students understand the relationship between current
expenditures, jobs and future income.
benchmark
lesson on
multipliers
➤ Potential Hurdle: It is sometimes difficult for students to identify the economic benefits and
costs of each entity. Students must be coached at this early stage to see the economic elements that
are necessary to make decisions so that they can eventually select entities that are good
investments. Students should see that economists look at benefits and costs in a different fashion
from city planners. Economists focus on the present value of the investments, in which the benefits
are discounted back to today’s dollars. As a result, they focus on making decisions today because
dollars generated in the future are not worth much today.
Planners focus on the future. An example of the difference between the two perspectives can be
shown with the Casino. Economists would weigh the income that the Casino generates today more
heavily than the income that it doesn’t generate in the future because they discount future dollars
to their present value. Alternatively, planners would focus on the potential for redevelopment in
five years. The investment dollars are less important than the potential to redesign. Because of
these different perspectives, the potential for redeveloping the land after the Casino ceases to
operate is of less concern to economists (who place relatively little value on future dollars) than
planners. Students should be made aware of this distinction at this early stage so that they can
better see land use as an investment once the problem changes direction.
The new information from the list of entities gives cause to revisit the
know/need to know. Examples of what might be added include:
What else do we know?
■
■
■
■
■
■
■
Entities require different acreage
Some entities will yield little
revenue
Some entities will cost the City a
lot of money
Some entities are fun
Some entities will help
Matildaville grow
Mayor has a political interest in the
ball park
Some entities will bring in dollars
What else do we need
to know?
■
■
■
■
■
■
■
■
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© 2002 Buck Institute for Education
revise
know /need
to know
What do Matildaville’s citizens
like to do?
Is gambling considered a leisure activity to
Ms. Grey?
Can undeveloped land ever be developed?
Why is the community college so big?
Why should we build a medical center?
How old are the people in Matildaville?
How much are citizens willing to pay for the
museum?
How much are the matching funds?
M A T I L D AV I L L E
The second resource given to students is the Criteria for Evaluating Entities table.
Students should be asked to fill in the table so that they can more readily
compare the implicit benefits and costs of each entity. Students should not spend
a great deal of time on this table. Ask them to fill in a yes, no or maybe to the
question so that they can later distinguish between investments for the future
and cash today. The class as a whole can do this. A copy of the table is located in
Appendix IV. Examples of items that students might put in each cell include:
table
Criteria
Grey Housing Development
Rose Casino
# Acres
5
8
Cash revenue to City at time of operation?
maybe
yes
Initial cash payments by City?
yes
yes
Benefits in the future to City?
yes (place for people to live)
maybe
Costs in the future by City?
yes (NIMBY)
yes (hotels not easily adapted to other use)
Return on investment?
A) now B) 10-years from now
yes
A) yes B) no
Domino effect on income or employment?
yes (employs workers to build)
yes (through employment of workers)
Conflicting with others?
no
maybe (political opposition)
Ms. Grey’s wishes?
yes (community minded)
no (not community spirited)
Be sure that students see all of the potential economic costs and benefits associated with each
entity by coaching for ideas that generate revenue and costs. By identifying economic costs and
benefits at this stage, students will be prepared to make an economic-based investment strategy
once the financial crisis is revealed. One way to help students along this line is to define each topic
header (i.e. economic concept).
Also be sure that students can justify their assessment of the costs, benefits and investment
potential. This table should generate much debate and discussion among students as to what is a
benefit, what is a cost, and what entities adhere to Ms. Grey’s wishes (e.g. “Since gambling is a
leisure activity, does it fit with her wishes?”). Students should be coached to see that the
evaluation of benefits and costs are subjective. So many unknowns exist that there are no right
answers. Instead, students must be coached to see that they should be able to justify their
assumptions and benefit/cost assessments (e.g. “Can you convince your boss, Fred Sully, that Ms.
Grey would consider gambling a leisure activity?”).
➤ Potential Hurdle: Coach students to see that they cannot expand the number of acres
available beyond the 96 acre limit and that they can not select entities that refuse to operate near
the dump or prison if either are selected. These are constraints that cannot be altered, just as the
budget constraint in The President’s Dilemma and the type of food prepared in The Food Court
cannot be altered. To allow students the freedom to alter these constraints on decision making offsets much
of the learning value in the problems. True learning of economics must include knowledge that
scarcity creates constraints under which individuals, firms, and governments must operate. If
students are allowed to increase the number of available acres (increase the budget deficit or alter
the nature of the food that is served by restaurants), they are not acknowledging that true costs
must be borne as a consequence of scarcity. Because recognizing these costs is an important part of
learning economics, students must be forced to stay within the constraints set forth in each
problem.
© 2002 Buck Institute for Education
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M A T I L D AV I L L E
Students should also be coached to see the consequences of using less than 96 acres when
determining which entities will operate on Matilda Grey’s property. Using less than the 96 acres
means that some of the resources available for economic development are not being used. In other
words, they are unemployed. All else equal, this lack of use will decrease the economic output for
Matildaville. (In economics terminology, this means that the City is operating below its production
possibility frontier.) Students must justify why they are leaving some resources unemployed and creating a
large opportunity cost for the City because revenue or investments are being foregone.
Once the table has been completed, revisit the problem statement. Did anything
change? Does the problem statement still state where we want to go?
The new problem statement might look like:
How can we, as economic research and policy analysts, select
entities so that Matildaville’s citizens have a good mix of
things to do?
The problem log could be used after students read the memo that describes the
entities and complete the table. Students might state how they believe the entities
could be used to keep Matildaville a thriving, well-rounded community or to
frame the characteristics in the form of costs and benefits. Perhaps the most
important use of the log in this lesson is as a check for the students’
understanding of the economic costs and benefits associated with each entity.
This knowledge will eventually be used to develop a solution to the problem.
revise
problem
statement
second
problem log
entry
➤ Potential Question to Ask: Select three entities from the list. What are the revenues and
costs that each will bring to the City?
The next resource given to the class is the memo from Mayor Victor Tharpe,
which describes the financial crisis that now exists in Matildaville and reorients
the students toward economic investments and growth. This memo tells the
students that Matildaville must raise revenue to meet on-going expenses, pay off
debt, and invest in economic growth.
memo from
Mayor Victor
Tharpe
➤ Potential Hurdle: Students will often want explicit information about each
entity. How much money will it bring in? How much will it cost to operate? How long will it
generate income? How much are the matching funds? Coach students to see that this information
will not be forthcoming, consistent with the way that decision making occurs in the “real world.”
We constantly must make decisions under uncertainty. We seldom know what the future will
bring. If a crisis arises, we may be forced to take action before all of the information is available. If
we are operating in the political arena, there may be misinformation presented as part of the effort
to persuade policymakers (or voters!) to enact a policy. Students must see that time pressures and
an uncertain world often force decisions to be made before all possible information is available.
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Coach students to see that interest rates play a dual role in investment decision
making. Perhaps most germane to this problem is their measure as the price of
loanable funds (i.e. the price the City has to pay on bonds to borrow money).
This interest rate determines the City’s ability to finance capital investments. As
benchmark
lesson on
Matildaville’s credit rating slips with the financial crisis, the price that it will
investment,
have to pay for financing investments will increase. (No one wants to loan
growth &
money to someone who defaults on payments unless they are compensated
interest
rates
nicely for the risk that they are taking!). As such, the interest rate that the City
will have to pay on bonds to finance new construction (for example) will
increase. This, in turn, will decrease the resources that the City of Matildaville can devote to
investing. This relationship between interest rate and investments represents the City’s supply
curve for investments.
Interest rates also allocate resources between consumption today and investment in the future.
Tradeoffs exist between 1) using resources to invest in future productivity and economic growth
and 2) using resources to provide cash, jobs, and income today. The higher the interest rate (as it
measures the rate of return on the investment), the more resources the City of Matildaville will
devote to future investments. This relationship between interest rate and investments represents
the City’s demand curve for investments.
At this point in the problem, students should have a firm understanding of these relationships. If
not, a benchmark lesson could be undertaken (Appendix II).
The memo from Victor Tharpe provides new information that gives cause to
revisit the know/need to know. Examples of what might be added include:
revise
know/need
to know
What do we know?
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
■
City is in a financial crisis
Warrant is out for Banks’ arrest
We must invest for the future
Need cash immediately
We must pay back debt
Mayor is in a campaign
Press release will be sent to business leaders
We need an investment strategy ASAP
Mayor will be held accountable for Banks’
actions
We have five years to recover
Interest on City bonds will rise
Banks has resigned
$160 million debt (possible)
Ability to borrow funds is limited
We must write a press release
Our job is on the line
Performance evaluation is based on strategy
What do we need to know?
■
■
■
■
■
■
■
■
What is the role that interest rates
play in this problem?
How does this financial crisis impact
our development plan for the land?
What are the bad investments?
How fast will each entity generate
dollars?
How much do we expect interest to
increase?
What is an investment plan?
How much revenue do we need?
What is a press release?
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The memo from Mayor Tharpe is the final resource that students will receive.
They should be coached to see that there are still many perceived need-to-knows
that will never be made known. This is decision making in the “real world.”
Public officials (and private citizens!) rarely have all the information necessary to
case studies
make decisions and students should be coached to see this. Students might also
be frustrated because they cannot see how the current financial crisis facing
Matildaville is “real world” or how investments and City finances are related. The case studies on
bankruptcy in Orange County and the luring back of the Raiders football team to Oakland can be
given to students for background reading (Appendix IV). These examples
illustrate financial difficulties that cities have encountered when making
investments.
The problem log should be used for the final time to ensure that students have
considered the issues of investment, economic growth and interest rates. Because
students must be coached to see the economic tradeoffs that now dominate the
development of Matilda’s land, the log should focus students toward the
investment-consumption decisions that must be made.
final
problem log
entry
➤ Potential Question to Ask: What must we now do in order to keep both
businesses and citizens in Matildaville?
Students should now be formed into their economic research and policy analyst
groups. These groups will ultimately write the investment strategy for
Matildaville.
If necessary, the class can revisit the know and need to know one more time and
finalize the problem statement. Once the final problem statement is developed,
the economic research and policy analyst groups should develop the summary
and justification of their investment plan for the city.
research and
policy analyst
groups
finalize
problem
statement
Teachable Moments, Dialogues, and Background Information
problem based learning is most effective with continual dialogue between the
teacher (as a coach) and students. When students are left to discover knowledge
or problem solutions on their own, without teacher coaching or use of problem
logs, students may flounder or stray off track. To prevent this, teachers must
actively direct students toward the curriculum goals with probing questions in
class discussions, by circulating and listening to discussions in group work, and
by evaluating the problem log with meaningful, useful comments.
benchmark
information
Because problem based learning is grounded in constructivist learning, several “teachable
moments” will arise when students readily need to know a particular economic concept or theory.
During these moments, teachers can use several techniques to teach concepts or theories. For this
purpose, we have included background information for benchmark lessons so that more
traditional lectures can be used for more difficult subject matter. Alternatively, a more Socratic
method could be used where the teacher coaches and probes students toward knowledge of
theories with the aid of textbook reading.
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In this lesson we have included information in the following areas for potential benchmark lessons
on investment and growth and for developing a press release.
multipliers
investment, growth, and interest
investment
economic growth
■ interest rate
■ productivity
■
■
public and private investments
private investment by corporations
■ stocks and bonds
■ bonds and interest rates
■ public investments
■
press release
BACKGROUND INFORMATION FOR BENCHMARK
LESSONS IS LOCATED IN APPENDIX II
Exit From the Problem
Students, as economic research and policy analysts for the City of Matildaville,
are asked to write a press release that details their investment strategy. As part of
the press release, the selection of the entities must be justified in terms of meeting
the City’s economic needs. A press release or a press conference is the most
common way that local officials communicate with the community. This is a
good opportunity for students to learn these methods of communication.
A benchmark lesson is included in Appendix II to help students put out a press
release on their investment strategy.
A rubric is provided in Appendix V to aid the teacher’s
assessment of the press release. This rubric can also be used
to guide students toward meeting the expectations of the
assignment.
press release
benchmark
lesson on
press release
rubric
When assessing students, remember that problem based
learning is most effective when the students are placed in real-life situations. As a consequence, if
students begin to alter the authenticity of the situation, the learning environment can easily be
reduced to fun and games. This negates much of the validity of the technique and knowledge
gained from the unit. To prevent this digression, it must be stressed that data and theories used in
all work must be accurate and reflect knowledge gathered from available resources. In other
words, students cannot make up data and scenarios. They cannot give bogus answers to real
situations.
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Students must be coached to see that a legitimate answer to a question is “I don’t know.” This
makes the classroom authentic. When presented with a problem outside of the classroom, there is
always more information available. But, unfortunately, time to seek out resources is limited and
this is one of the lessons that problem based learning teaches. To enable students to gain this
insight, they must learn to say (or write!) that they do not have the data to give an appropriate,
accurate answer. There are limited answers because data are limited. Students cannot make up
answers. They must use the information that is provided.
Wrap-up and Debriefing
It is critical that the wrap-up and debriefing section of the unit not be ignored.
This is the part of the unit in which students, as a class, are given feedback on
both process and content. It is imperative that incorrect knowledge or statements
be corrected at this point in the problem. How the debriefing is conducted is less
important than the fact that it is conducted.
wrap-up and
debrief
Process Debriefing
It is important that students have a chance to discuss how they felt about the process. This could
be done with a series of questions. For example:
How do you think you did?
Is there anything that you think you left out?
■ Is it difficult when there is not one right answer to the problem?
■ How does it feel to go through the problem without specific direction?
■
■
These questions could be used to help guide the students toward a discussion about how the
process helped them learn about economics.
Content Debriefing
It is important that students see that any investment strategy will contain tradeoffs and
opportunity costs. In other words, the entities that are chosen to operate on Matilda’s property
may bring in income today. If so, that income will be at the cost of allowing other entities to
operate that will provide investments in future economic growth. It is imperative that students
understand the tradeoff between debt undertaken today and economic growth in the future. That
is, there is a tradeoff between consumption today and consumption later. This tradeoff defines
investment, which is simply the bearing of costs today (i.e. giving up consumption today by
incurring debt) for benefits in the future, such as economic growth in income and jobs in the City.
As a consequence, the debriefing should help students grasp the concept of tradeoff. When
resources are scarce, there is a tradeoff between providing income and jobs today and increasing
the productivity and income of citizens of Matildaville in the future. Care should also be taken to
ensure that students understand the role that interest rates play in allocating resources between
present consumption and future investments.
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Do’s and Don’ts
In reading through this problem, changes come to mind. In this section we highlight changes that
have worked and changes that have not worked. Please do not try the ideas that have failed, even
though the temptation is great!
Ideas to try
It is but a short step to equate the local economic growth and level of economic activity in
Matildaville to the nation’s economic growth and level of economic activity (i.e. Gross Domestic
Product). In fact, in this lesson, you can reintroduce and reinforce many of the macroeconomic
issues that are taught in The President’s Dilemma.
This unit could be linked to a social science unit on urban geography by having the students map
the land development on Matilda’s property. Be sure that the mapping is begun after the
investment strategy has been developed or students may focus on the geographic issues and not
the economic investment strategy.
Linking this unit to a government project would help students see how cities work. Students could
be asked to participate in local government or community organization meetings. Speakers from
the local city government could be invited to speak on local economic issues.
A video tape could be used in place of the press release as the exit from this problem. Students
could make a video of a press conference or do a news broadcast about the investment strategy
that they have chosen. Of course, you can always have the students do a presentation or a written
report as the exit from the problem. However, this approach negates the opportunity to have them
practice a different form of communication via the press release or video tape.
Ideas not to try
At first, it may appear that this problem could be enhanced by providing students with estimates
of economic costs and benefits of each entity (and thereby allow computations of rates of return).
However, students get bogged down with nuances of numbers and lose sight of the economic
relationships that underlie the numbers.
Although describing the City of Matildaville in terms of your city may seem to make the problem
more real or interesting, the nature of the discussion might easily focus on local politics or local
concerns, which may not contain an economic or investment focus. If Matildaville remains a
generic, middle America city, students can better focus on the links between investment and
economic growth without being distracted by extraneous concerns.
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Appendix I:
Entry Document
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Interoffice
MEMORANDUM
To:
Economic Research & Policy Analyst Group
From:
Fred Sully, Director, Matildaville Community Economic Development Agency
Subject: Appropriate Entities for Land Development
CC:
Mayor’s Office
As I explained to you briefly at our staff meeting last week, you have the extremely exciting, and
I would hope, pleasant task of determining what we should do with the property bequeathed to
the City by the late Matilda H. Grey. Ms. Grey left us 96 acres of undeveloped land that overlaps
the central business district of Matildaville. Currently the land is vacant and not producing revenue. Reginald Banks, the City’s Treasurer, has assured us that the City’s stable financial situation means we can use this land for whatever purposes we choose.
As the Economic Research and Policy Analyst Group for the Community Economic
Development Agency, you will be expected to make a recommendation for the use of the land.
The complement of entities eventually housed on this undeveloped land must reflect Ms. Grey’s
high aspirations for the community. Remember, Ms. Grey was an urban planner and a philanthropist who was committed to maintaining a community rich in arts, theater, music, education,
and leisure activities. She wanted Matildaville to remain a thriving and well-rounded community. In selecting entities you might also consider the land’s potential for generating cash today, initial cash outlays that are required, benefits and costs that may accrue in the near future, and
potential for investment.
Please also remember that our citizens are happy with the current social and economic climate in
Matildaville. We are, and strive to be, a medium-sized Midwest City of about 250,000 residents
within a surrounding area of about one million people. Our unemployment rate approximates
the “natural” rate. While our wealthier citizens would like Matildaville to become a world-class
city with respect to the arts, our less fortunate citizens simply want a sound economy that provides steady employment, and our middle-class citizens want a wholesome family environment.
You will soon be receiving a list of entities that want to operate on this land. Once you have
reviewed the list, please prepare a written report that includes your selections of the appropriate
entities that will be developed on the land. Please explain in your report why you chose each
entity. A Citizen’s Task Force that included representatives from Ms. Grey’s family compiled this
list of entities. As part of their deliberation, the Task Force ensured that these entities would be
useful to the community.
Please note that the acreage needed by each entity is exact and cannot be altered nor can other
entities be added to the list. The City cannot sell the land but can leave a portion undeveloped.
There are no restrictions on development. In fact, concerns about such things as traffic flow and
parking have been taken into consideration when approving plans. An environmental impact
report has been completed for each entity. Additionally, each entity has a well-developed, preapproved plan for construction and landscaping and has all of the necessary permits. It is estimated that each entity could be at full operating capacity within 6 months to a year, although
costs must be borne before operation can begin.
Please have your report to me in two weeks.
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Appendix II:
Background Information
for Benchmark Lessons
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MULTIPLIER EFFECT
The “multiplier effect,” or multiplier, causes a curious feature in local and national
economies. A 15 million dollar change in investment spending, for example, will lead
to an approximately 60 million dollar change in the output-aggregate income level. The
multiplier is the ratio of a change in the local economy, or Gross Domestic Product
(GDP) at the national level, to the initial change in investment spending that, in our
example, causes a change in real income for Matildaville.
The multiplier is based on the “fact” that the local economy is characterized by
repetitive, continuous flows of expenditures and income through which dollars spent
by an individual are received as income by another. This means that any change in
income or investment spending will cause both consumption and saving to vary in the
same direction. It follows that an initial change in the rate of spending in Matildaville
will cause a spending chain reaction which, although of diminishing importance at
each successive step, will cumulate to increase income in the City (or GDP at the
national level). Thus, because of the multiplier a relatively small change in the investment
plans of business (or the City) can trigger a much larger change in income to Matildaville (or
GDP at the national level). The formula is:
Multiplier =
change in real income for the City
initial change in spending or investment
Note that income for the City, in this case, includes both public and private income. It
is equivalent to GDP (=C+I+G) at the national level.
For example, in Matildaville the workers employed at the Rose Casino, Steve Brown
Productions, the Sluggers, etc., will receive wages for their efforts. Part of this money
(approximately .75) will be spent within the City of Matildaville. This spending will
generate growth in employment in another sector of the economy, which will generate
increased employment and wages and regenerate the cycle. If the marginal propensity
to consume in Matildaville is .75, the initial expenditure of income by a business will
generate four times that amount (1/1-mpc) in Matildaville’s aggregate income.
Note that the reverse is also true. When Banks took money out of Matildaville’s economy, the
loss became greater because the decrease in income gives rise to a much larger decrease in
economic activity through the multiplier.
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INVESTMENT, GROWTH, AND INTEREST RATES
Most of economics begins with the assumption that full employment and full production
exists, given the quantity and quality of resources and technology available. Therefore,
the level of resources must increase or become more productive, or technological
progress must occur before economic growth can occur. One of these changes is
necessary for a full-employment economy to enjoy greater output of goods and services.
We assume that Matildaville is at full employment and full production prior to its
financial crisis.
Investment
Investment in resources, human or capital, occurs as long as the rate of return on the
investment—the benefit—exceeds the cost of the investment. Interest rates, as the price of
investment, represent revenue for the individual who is loaning the funds and a cost for
the individual (or city!) who is borrowing the funds. This works in much the same way
that the price of a good represents revenue to a firm and a cost to a buyer.
In terms of investment, tradeoffs exist between 1) using resources to invest in future
productivity and economic growth and 2) using resources to provide cash, jobs, and
income today. Interest rates are used to allocate resources between consumption today
and investment in the future. As interest rates increase, more resources will be devoted to
investments, all else equal. This relationship between interest rates and investments
represents the City’s demand curve for investments.
Interest, as it measures the price of loanable funds, determines the ability to finance
investments. As the price of obtaining a loan increases, fewer investments will be made,
all else equal. This relationship between interest rates and investments represents the
City’s supply curve for investments.
We can therefore diagram the equilibrium rate of investment within the standard supply
and demand framework. The demand for investments decreases as its rate of return (i.e.
interest rate) decreases and the supply of loanable funds increases as its return increases.
Interest rate
Supply (interest reflects the amount paid on loaned funds)
Demand (interest reflects the rate of return on investments)
Dollars invested
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Economic Growth
For economic growth to occur, we must consider the possibility of investment. That is,
“goods for the present” can be traded or invested in “goods for the future” (e.g. capital
goods, research and education, and preventive medicine that would increase the
quantity and quality of property and human resources, and enlarge the stock of
technological information). By choosing an output more conducive to technological
advance, or to increasing the quantity and quality of property and human resources,
Matildaville can achieve economic growth and increase output in the future. In
contrast, a city whose current choice of output places less emphasis on “investment”
goods and services and chooses to make larger additions to its current stock of revenue
will forego output in the future. While the benefit from this choice is more consumer
goods in the present, the opportunity cost is more rapid economic growth (i.e. greater
future productive capacity).
Interest Rate
The interest rate is an extremely important price in allocating present and future
consumption of goods and services. It simultaneously affects both the level and
composition of investment goods production. An increase in the rate of return (interest
earned on investment) will increase investment in resources for future production, and
vice versa.
Here’s an example. If the expected rate of return on additional physical capital is 14%
and the required funds that can be secured for its purchase are at an interest rate of
10%, business will be able, in terms of profit, to borrow and expand (i.e. invest) its
capital facilities. The benefits from the investment at a rate of return of 14% exceed the
cost of undertaking it at an interest rate of 10%. If the expected rate of return on
additional capital is only 8% or if the interest rate is 15%, it will be unprofitable for
accumulation of more capital goods (i.e. investment) to occur.
The interest rate allocates money to businesses that are most productive because increased
productivity means that the rate of return is higher.
Productivity
Another important consideration in economic growth is increased productivity. Output
produced from existing resources can be increased with productivity gains. In fact,
growth in productivity has been the most important force in growth of our real
domestic output and national income in recent years. Increases in the quantity of labor
account for only about one-third of the increase in real national income in this century
with the remaining two-thirds attributable to raising labor productivity. The latter can
be viewed as an investment, since much of the productivity gain has resulted from an
investment in human capital (e.g. increased education and training), which increases the
per unit output from labor.
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PRIVATE AND PUBLIC INVESTMENTS
Investment refers to expenditures for improvements to resources. The improvements
are expected to generate income. Both private firms and the public sector can use
today’s resources for investment. However, one of the main advantages that
corporations hold over the public sector is flexibility in financing. For firms,
investments can be financed through either the sale of stocks or bonds, while
municipalities such as Matildaville are restricted to the sale of bonds.
Private Investment by Corporations
For firms, investment spending is guided by the profit motive. The business sector
invests only when it expects investments to be profitable. That is when the benefits
from investments exceed their cost. Corporations finance their investment activities in
three ways. First, a large portion of business activity is financed internally out of
undistributed profits. Second, businesses, like individuals, can borrow from financial
institutions. Third, common stocks and bonds can be issued.
Stocks and Bonds
A common stock is an ownership share. The household that purchases a stock
certificate has the right to vote in the selection of officers in the firm and to share in any
declared dividends. In contrast to the ownership value of stocks, a bond purchaser
simply lends money to the firm. A bond is merely an IOU, in acknowledgment of a
loan. In exchange for the loan, the firm promises to pay the bondholder 1) a fixed
amount at some specified future date and 2) other fixed amounts—interest payments—
every year up to the bond’s maturity date. These characteristics of bonds exist whether
the issuer of the bonds is a public entity, like Matildaville, or a private entity, such as a
business.
Stocks and bonds differ in important ways. First, the bondholder is not an owner of the
entity, but is only a lender. Second, bonds are considered to be less risky than stocks
because bondholders have a “legally prior claim” upon business earnings. Dividends
cannot be paid to stockholders until all interest payments due to bondholders have
been paid. As a result, stockholders do not know how much their dividends will be or
how much they might obtain for their stock, should they decide to sell.
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Bonds and Interest Rates
The purchase of bonds is not risk free. The market value of the bond may vary over
time with the financial health of the business (or city). For example, if a firm or public
entity (such as Matildaville) encounters economic misfortunes that raise questions
about its financial integrity, the market value of its bonds will fall. If a $1,000 bond is
sold prior to maturity, it may only fetch $600 or $700 because of the decline in the
probability of repayment.
Changes in interest rates also affect the market prices of bonds. Increases or decreases
in the interest rates cause bond prices to fall or increase. For example, if you purchase a
$1,000, 10-year bond today when the interest rate is 10%, you will receive a $100 fixed
interest payment each year. If the interest rate increases to 15%, the bond must now be
guaranteed at $150 fixed annual payments on the $1,000 bond. This is because no one
will be willing to pay $1,000 for the bond that pays only $100 of interest income
annually when new bonds can be purchased for $1,000 and yield $150 of annual
income.
Public Investments
While firms generate revenue from the sale of goods and services, governments must
find other means to finance production of consumption or investment goods. Cities
such as Matildaville often rely on bonds to finance investments and tax revenues to
finance ongoing expenditures. If government spending on consumption goods (e.g.
subsidies for school lunches or cars for government officials) occurs through debt (such
as bonds), then paying for consumption today has been shifted to future generations. If
government spending on investment (e.g. highways, education, or health) occurs
through debt, the economy’s future productivity capacity is increased. In this case, the
resources of future generations may not be decreased. Instead, the composition is
changed so there is more public capital and less private capital.
This raises a potentially serious problem with the increase of public debt to finance
investment (e.g. through the issuance of bonds). The investment in humans or physical
capital by public entities, like Matildaville, may well crowd out private investment.
That is, deficit financing may increase interest rates and reduce investment spending by
private firms. If this should happen, future generations would inherit an economy with
a smaller productivity capacity and, thus, be faced with a lower standard of living. This
occurs because the impact of an increase in public spending falls on those living when
it occurs. In a full employment economy, an increase in government spending will
orient current consumption away from private (i.e. business produced) goods and
services and toward public goods and services.
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Press Release
WHAT IS A PRESS RELEASE AND HOW DO POLITICIANS USE A PRESS RELEASE?
A press release is an announcement given to the media (newspaper, radio and television
reporters) by government or business leaders. The press release contains information
about an event, issue, or story that its writers hope will be covered in the news reports.
When writing a press release, put all of the important information, including the “Who,”
“What,” “Where,” “When,” and “Why” in the first paragraph. The beginning paragraph
may be the only part of the press release reporters will read, so it should include all they
need to know and it should entice them either to call or read further for more detail. In
subsequent paragraphs in descending order of importance, put the supportive facts and
supplemental information that may be of secondary interest to the press.
The media, especially television and radio, seek news that is fresh and out of the ordinary.
In the first instance, if a public leader makes a statement that is similar or the same as
statements he or she has made in the past, the information is not likely to be reported
because it is not new. The statement may provide important information to the public, but
it will not attract attention in the same way that a radical departure from past statements
would make people take notice. Second, the media report stories that are out of the
ordinary, exciting, provocative, or unusual rather than important. As an example, if the
mayor gives a speech about a new traffic plan for the downtown area and falls off the
stage while giving his speech, the media will give much more air time to the mayor falling
off the stage than to the new traffic plan, even though the traffic plan may have serious
consequences for the businesses and citizens of the city.
Given the tendency of the press to report what is fresh and what is out of the ordinary, the
press release must appeal to these preferences or it will be ignored. Place the elements of
“what is new” and “what is out of the ordinary” at the very beginning of the press release.
The press release is also an opportunity for the writer to put a particular spin or
interpretation on the event being reported. A politician, for instance, uses the press release
to convince the press, and ultimately the public, to believe the politician and support his
or her position. You will use the press release to advantage if you put the “facts” in a light
favorable to your cause. The “spin” should be consistent and evident throughout the press
release.
Here are some other rules for writing a press release:
• At the top of the release, include the name and phone number of a contact person
• Start the release with the city and release date. It is very important to include the date
so that reporters know how old your story is. Reporters read dozens of faxed and
mailed press releases every day and sometimes they go through them quickly. The date
will make it clear that yours is a new, “hot,” or immediate issue
• Keep the heading (title) short (reporters won’t use it, but it should grab their attention)
• Keep it simple. Do not use acronyms and long, difficult words
• If the press release runs longer than one page, write “MORE” at the center bottom of
each page and end the release with three pound signs (###), which signals the end
• Double space the body of the press release
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(SAMPLE)
PRESS RELEASE
FOR MORE INFORMATION, CONTACT:
Marisa Unvert, Assistant Press Secretary
555-1234
Fax: 555-1212
FOR IMMEDIATE RELEASE
MAYOR THARPE POISED TO OVERCOME CITY’S FINANCIAL SETBACK
MATILDAVILLE (October, 2010) - Mayor Tharpe has acted swiftly in putting together a
team of economic experts charged with devising a solution to the economic setback
caused by the misguided investments of City Treasurer Reginald Banks. According to
Mayor Tharpe, the bequest of property from the estate of Matilda H. Grey will help the
City regain its position as one of the strongest municipal economies in the nation. Ms.
Grey’s bequest to the City will be used to generate cash today to meet on-going expenses, to pay off the debt, and to invest in our City’s economic growth. Mayor Tharpe will
present his plan for the development of Ms. Grey’s bequest to a group of City business
leaders at a luncheon on Friday.
Reginald Banks resigned as the City Treasurer after the mayor’s office disclosed Banks’
misguided investments and suspect use of pension and other City funds. The Mayor has
announced that federal officials will step in to investigate Banks’ activities as City
Treasurer. Banks is said to be on retreat in Ste. Croix.
###
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Appendix III:
Concept Definitions
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The curriculum was designed to teach the following concepts:
Concepts in boldface are defined below. Concepts in italics are defined elsewhere in the
definition list.
Costs (of production): The measure of what has to be given up in order to achieve (produce)
something. Total costs include both opportunity costs, the cost of alternative uses of
resources, and direct costs, total money outlays.
Direct Costs: The accountant’s definition of cost. The total money expenditure or outlays
necessary to achieve a resource or good or service.
Growth: The amount by which the stock of resources changes.
Income: The flow of money that accrues to an individual, group, or firm over some period of
time. It may originate from land (called rent), labor (called wages), capital (called interest),
or productive resources (called profit). It may also stem from sources outside of the
market (e.g. gifts) or it may be in-kind (e.g. company car).
Indirect Cost: See opportunity cost.
Interest Rates: The price of loanable funds, which is usually expressed as annual percentage
and measures the yearly cost of borrowing. The price paid per dollar borrowed per
period of time.
Investment: An expenditure, usually on capital goods, that involves an initial sacrifice followed
by subsequent benefits. Investments can be made by governments (public investment)
or by private individuals or businesses (private investment).
Multiplier: The ratio of the change in (the City’s) aggregate income that results from a change
in expenditures.
Nominal Interest Rates: The interest rate taken at its face value. That is, the interest rate
expressed in current dollars not adjusted for inflation.
Opportunity Costs (Indirect Costs): The real sacrifice involved in achieving something. The
value of the next best opportunity that is foregone in order to achieve a particular thing.
Productivity: A measure of average output or real output per unit of input.
Public Debt: The total amount owed by the government (to the owners of government
securities). It is equal to the sum of the past budget deficits (less budget surpluses).
Real Interest Rates: The actual return to capital. Because comparing nominal interest rates
includes a purely monetary component, the value of the rate must be purged of changes
in prices to be compared over time. It is the rate obtained after eliminating the element
of price change.
Resources: Land, labor, capital, or entrepreneurs used to produce other things to satisfy humans’
wants.
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Scarcity: A condition where less of something exists than people would like if the good had no
cost. Scarcity arises because resources are limited and therefore cannot accommodate all
of our unlimited wants.
Tradeoff: An exchange relationship denoting how much of one good (or resource) is needed to
get another good (or resource).
Uncertainty: More than one possible outcome to a particular course of action. Although the
form of each possible outcome is known, the probability of getting any particular one of
the outcomes is not known.
Teachers can also demonstrate the following concepts using this lesson:
Bonds: An IOU, in acknowledgment of a loan, whereby the corporation or government
promises to pay the holder a fixed amount at some specified future date and other fixed
amounts (interest) every year up to the bond’s maturity date.
Capital: Human-made resources used to produce goods and services. These are goods that do
not themselves directly satisfy human wants.
Crowding Out: When the government borrows money, the associated rise in interest rates
decreases planned investment spending by private firms and individuals. As a result,
government expenditures are said to “crowd out” those by private firms.
Depreciation: The reduction in value of an asset through wear and tear.
Financial Capital: The provision of money for commercial use (i.e. to purchase capital goods),
which can be for short, medium, or long-term use. Income that is received by those who
supply the economy with financial capital is called interest.
Gross Domestic Product (GDP): The dollar value of all final goods and services produced by
resources located in the country during a year.
Human Capital: The skills, capacities, and abilities possessed by an individual that increase his
or her productivity, and hence wages, in the labor market.
Labor: The physical and mental talents or efforts of people that can be used to produce goods
and services.
Land: Natural resources (“free gifts of nature”) that can be used to produce goods and
services. Income that is received by those who supply the economy with land is called
rent.
Present Value: The value of a sum (or sums) of money that will be obtained in the future.
Money now is worth more than money in the future (time value of money), both because
of uncertainty and because money accrued today could be invested to produce greater
sums of money in the future. As a result, today’s worth of money that will be obtained
in the future must be discounted by a rate of interest equivalent to the rate at which it
could be invested.
Rate of Return: The price earned on an investment.
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Rent: Income received by those who supply the economy with land.
Subsidy: A payment by government (for example) for which no good or service is received in
return.
Tax:
A compulsory transfer of money from individuals, institutions, or groups to the
government, which may be based on either wealth or income or as a surcharge to prices.
Time Value of Money: Because preference is for current as opposed to future consumption, an
individual (firm or institution) must be compensated for loss of current consumption.
For example, suppose we asked an individual, “If you were to give me $100 today in
exchange for a promise to pay you a sum of money in one year’s time, what would that
sum of money have to be to compensate you for the loss of the current consumption
(without inflation)?” An answer of a dollar value greater than $100 indicates that the
individual has a preference for present consumption because he or she must be
compensated for the loss of current consumption. An answer of $100 indicates that the
individual has no preference between present and future consumption. An answer of
less than $100 indicates that the individual has a preference for future consumption.
Wages: The price paid for the use of labor services, which is grounded in its productivity.
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Appendix IV:
Resource Materials
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Interoffice
MEMORANDUM
To:
Economic Research & Policy Analyst Group
From:
Subject:
Fred Sully, Director, Matildaville Community Economic Development Agency
Appropriate Entities for Land Development
The following is a list of potential entities that can be developed on the land left to us by
Matilda H. Grey. We have a total of 96 acres. This list includes a description of the entities,
the pros and cons of each entity, and the total number of acres that each entity will require.
This list contains a diverse set of entities, none of which exist in the community today.
Some entities will contribute to Matildaville’s economy today, some will provide solid
investments for Matildaville’s future, some will continue to build Matildaville’s economy
through the multiplier effect, and some will help Matildaville become a thriving, wellrounded community.
Please note that the Museum of Art, the Sluggers, the Golf Course and the Youth Center all
refuse to locate on the land if it contains either a dump or a prison. Note also that many of
these entities must be financed with City funding to begin operation. In general, financing
can occur in one of two ways. Bonds can be issued and/or taxes can be levied on citizens
or businesses in Matildaville. However, neither citizens nor businesses will approve tax
increases. Issuing bonds will increase public debt not only because borrowing is debt but
also because increasing the debt increases the rate at which money can be borrowed,
which is the interest rate.
Leftover Land: Land can be left undeveloped.
Pros: No debt would be incurred because no development costs would be borne. As a result,
interest rates on bonds would be less likely to rise than if borrowing for development.
Cons: The opportunity cost of leaving land undeveloped (i.e. not investing in development)
can be high. Money is foregone both today and in the future because the land is left idle.
Mott Prison: Governor Frank L. Mott is requesting acreage to construct a maximum security
prison. Since Matildaville has both the necessary acreage and labor force to construct and
maintain the prison, he sees the prison as a good means to bring federal dollars to the state.
Federal dollars will be used to construct and maintain the prison. Required Acres: 18
Pros: The prison will generate construction jobs initially and provide thousands of relatively
high-paying jobs as security guards, social workers, and service workers once the prison is
in operation. All construction, operating, and maintenance expenses will be paid by the
federal government.
Cons: Many firms will not locate on acreage with a prison. Not In My Back Yard (NIMBY)
attitudes prevail. Anti-prison sentiments are strong because citizens believe prison walls
will detract from the beauty of downtown Matildaville. Citizens fear that “hardened”
criminals housed in Matildaville will be a threat to the safety of the community.
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Matildaville Community College: A community college in Matildaville will provide twoyear college degrees as well as licensing programs in nursing, auto mechanics, and
computer technology. Once the community college is up and operating, tuition and
subsidies from the state and federal governments will offset its costs. Required Acres: 70
Pros: The college will bring the community immediate benefits by providing job
opportunities for teachers, administrators and staff. Once students graduate, Matildaville
will have a well-trained labor force. This resource will attract new businesses to the City,
and help existing businesses expand their labor pool. Rates of return on community
college degrees are estimated at 15 percent for the City, primarily because graduates of
the college will be more productive with additional education.
Cons: The Community College will require initial cash outlays for buildings, equipment,
and staffing. In order to raise these funds, the City must increase public debt with the
issuance of bonds. The Community College’s ability to provide the City with a skilled
workforce is not guaranteed because it is difficult to predict the skills employers will want
in the future.
Rose Casino: The Rose Company will build a hotel and a gambling casino and will leave
the casino to the City once the anti-casino law goes into effect in five years. Required
Acres: 8
Pros: The City needs no funds for construction with the Rose Company financing. The tax
revenues generated for the City will greatly increase its capacity to expand public
services. Because the City retains rights to any improvements on property, the hotel and
casino buildings will become City property once the Casino is closed in five years. During
its five years of operation, the Rose Company will employ many of Matildaville’s citizens
in its hotel and casino.
Cons: Unfortunately, the Citizens Against Gambling have convinced the state to pass
legislation that will make gambling illegal in five years. As a result, tax revenues to the
City from the casino will accrue only for five years. Because hotels in Matildaville are
currently underutilized, there may be little use for the hotel and casino buildings once
they are vacated. As a result, the City will bear substantial costs to convert the buildings
to alternative uses once they are vacated.
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Museum of Modern Art: Ms. Grey’s dream was to build a museum that would rival the
modern art museums in such cities as New York, Washington D.C., and San Francisco.
The museum would house Ms. Grey’s extensive collection of paintings and sculptures by
Frieda Kahlo and Jacques Liptchitz as well as an assortment of works by other artists.
Required Acres: 5
Pros: The museum would be a big boon to art enthusiasts, bring international recognition
to Matildaville in the arts community, and provide culture to the City’s residents. Monies
from patrons of the arts would partially offset construction costs and admission fees will
make it possible for the museum to break even once it is operating. It was Ms. Grey’s
fondest wish that her finest works of art be displayed to the citizens of Matildaville and to
its visitors.
Cons: The museum holds little appeal for the majority of Matildaville’s residents.
New York Dump Site: The City of New York has requested land-fill space for dumping its
garbage. If the New York dump is located on the Grey site, it would add an additional $15
million a year to Matildaville coffers. Acres Required: 18
Pros: There will be no cost to the City in building and maintaining the dump site and the
City will make $15 million a year from New York. Revenues will accrue over the entire 20year period that the dump is in operation.
Cons: NIMBY attitudes prevail. Many firms will not locate on acreage with a dump.
Matildaville Municipal Golf Course: The plans call for a beautifully landscaped,
regulation nine-hole course that will meet the strictest environmental standards. Required
Acres: 65
Pros: A golf course in the center of town will provide leisure to residents and be a jewel to
attract visiting business people and tourists. Once the golf course is built, green fees will
offset maintenance costs so that operating expenses will not be borne by the City.
Cons: Public debt would be increased in order to finance the construction of the course.
Madame Curie Medical Research Laboratory: The medical laboratory was of primary
interest to Ms. Grey and her family. The laboratory would be devoted to researching and
developing treatments and cures for major childhood diseases. Required Acres: 18
Pros: The research lab will bring prestige to the community, provide high-paying jobs to
professionals, train individuals for technical positions in health, and increase medical
knowledge for society as a whole. Matching federal grants will help finance the building
of the laboratory, and research grants will bring additional revenue into the community.
Economic benefits in the future are virtually guaranteed because of the growing emphasis
on health care in our society.
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Cons: A prestigious research laboratory requires the ability to attract and retain
professional staff in Matildaville. Appropriate conditions include sufficient cultural
amenities (e.g. symphonies, museums), entertainment that suits their tastes (e.g. golf and
tennis facilities, yachting), and a favorable ambiance. This infrastructure must be
developed in order to lure professionals to Matildaville. Public debt will be needed to
finance the infrastructure changes and to match the federal funds for construction of the
lab. The benefits of the laboratory will be in the future because of the time involved in
recruiting highly skilled professionals to the lab, establishing the lab’s reputation, and
developing support structures necessary for sustaining such a prestigious institution.
Youth Center and Skateboard Park: The Youth Center will provide middle school and
high school age youth with a place to go, constructive activities, a homework tutoring
center, and a computer lab. Adjacent to the center will be a skateboard park and a “snack
shack” with plenty of room for dances and parties with live music. Required Acres: 5
Pros: Families will be attracted to a city that maintains wholesome activities for children.
Cons: The Youth Center must be financed with bonds and maintained by revenues
generated from payment for activities that it offers. It is expected that these revenues
would sustain a self-supporting Youth Center but would not generate money for the City.
Matildaville Sluggers: One reason for the Mayor’s victory in the last election was his
promise to bring a professional baseball team to Matildaville. The Sluggers have voiced an
interest in coming to Matildaville once the City has a stadium that meets the team’s needs.
Required Acres: 18
Pros: A professional baseball team would bring recognition and pride to the City, jobs for
skilled citizens, and revenue to the City from luxury boxes, concessions, and advertising
rights.
Cons: Public debt would be increased in order to finance the building of the stadium. The
revenue generated from the luxury boxes is uncertain as it is dependent upon their
purchase by high-profile businesses and high-income individuals.
Grey Housing Development: Low-income housing will be developed to provide lowskilled and aged members of the community a safe and attractive place to live. Required
Acres: 5
Pros: Low-income housing is a responsible, good-will effort by the City that gives people
without many skills a place to live. The housing will be financed and maintained by the
federal government. This means that no income will flow through City coffers. Federal
funding will cover all of the costs of construction. Many of the workers who will live in
this project are the source of labor for firms providing service sector jobs.
Cons: Low-income housing projects around the country are plagued with public and
individual safety concerns. Their negative public image invokes the NIMBY response in
many of Matildaville’s higher income citizens. Should this attitude develop, citizens and
entities that are not civic minded may well abandon properties near the housing.
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Grey Business Park and Towers: This complex of buildings would house some of
Matildaville’s most lucrative firms and provide space for the growth and development of
businesses new to the City. Required Acres: 7
Pros: By providing new office buildings for lease, the City would reduce the cost of office
rentals. As a result, new businesses would be attracted to the City. This would provide
more job opportunities for the citizens of Matildaville.
Cons: Corporate real estate magnets are reluctant to invest in Matildaville because the City
does not have a strong history of business development. As a result, the City must
subsidize development by offering investors low interest loans. The subsidization for these
loans must come from City coffers.
Preservation Park: The park will be devoted to the preservation of the natural habitat of
the black squirrels, whose only home is Matildaville. The park will also provide peace,
tranquillity, and jogging trails for Matildaville’s adult citizens, and contain a large play
area for the City’s children. Required Acres: 18
Pros: The park is a high priority for the environmentalist who support the Mayor’s reelection. Ms. Grey was a strong supporter of the effort to maintain a natural habitat in the
City’s center.
Cons: Costs for maintaining the park must be borne by the City’s residents.
Steve Brown Productions: Steve Brown’s production company needs property. Mr. Brown
is an Academy Award winning special effects producer. His production company
develops, constructs, and demolishes props and scenery for thrillers and action films.
Required Acres: 70
Pros: Steve Brown Productions will pay the City millions of dollars over five years to
use the Matildaville property. While using the property, the company will provide jobs
for skilled and unskilled workers and donate usable props and scenery to the
Matildaville Players, a local theater production company.
Cons: Since the company builds and destroys environmentally unfriendly “props” such
as volcanoes and mock oil spills, the land will be left unusable once it is vacated. It will
cost the City millions of dollars to restore the property to its environmentally sound
state after Brown leaves the property in 5 years.
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#
Acres
Cash revenue
to City at time
of operation?
Initial cash
payments
by City?
Benefits in
the future
to City?
from now
Costs borne Return on
in the future investment?
by City?
A) Now B) 10 years
Answer questions with a “Yes,” “No,” or “Maybe.” Be sure that you can justify your decisions.
Steve Brown
Productions
Preservation Park
Grey Business Park &
Towers
Grey Housing
Matildaville Sluggers
Youth Center &
Skateboard Park
Madame Curie
Medical Lab
Matildaville
Municipal Golf Course
New York
dump site
Museum of
Modern Art
Rose Casino
Matildaville
Community College
Mott Prison
Leftover land
Name
Criteria for Evaluating Entities
Domino effect
on income or
employment?
Conflicting
with others?
Ms. Grey’s
wishes?
M A T I L D AV I L L E
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HIGHLY CONFIDENTIAL
Memo
To:
From:
Subject:
CC:
Research & Policy Analyst Group
Victor Tharpe, Mayor of Matildaville
Matildaville’s Pending Financial Crisis
Fred Sully, Director, Matildaville Community Economic Development Agency
As you know, last night I announced the resignation of our City Treasurer, Reginald Banks.
His resignation came after it was disclosed that many of the firms with which he had made
highly leveraged investments had filed for bankruptcy. Banks, in his last conversation with
me, claimed that he was a victim of bad advice. This “advice” cost the city over $160 million
or about 40% of our annual budget. The probability of recouping these funds is extremely
small. Federal agents have issued a warrant for Banks’ arrest on grounds of fraud. Banks is
said to be in seclusion in Ste. Croix.
Sadly, Matildaville must bear the brunt of repaying this debt. Repayment will take at least
five years, probably more, and will require unpleasant sacrifices to get the City back on its
feet. Debts of this magnitude will throw the City into a financial crisis. Interest rates on City
bonds will rise. These high rates will affect our ability to borrow money to finance publicsector projects and will send a negative signal to businesses about our economic stability.
During these hard times, we must meet three types of needs. First, unless we raise cash
immediately, we will not be able to meet current on-going expenses (e.g. City payrolls,
public services). Second, we must pay off this debt in the near future without dramatically
increasing the interest that we must pay on our bonds. As you know, an increase in interest
rates increases the cost of investment. This higher cost will ultimately curtail our ability to
invest in Matildaville’s future by limiting economic growth. Third, we must make
investments to build a solid economic future for the City. As you know, investing in the
future reduces current spending but, unless we improve economic prospects in Matildaville,
businesses will leave our town.
Unfortunately, my opponents in the upcoming mayor’s race will hold me responsible for
Bank’s actions. Before they go on the offensive, we must develop a sound investment
strategy that meets the City’s needs. The only potential for this comes from Matilda H.
Grey’s bequest. By carefully planning and developing her land, we can raise the cash
necessary to operate the City and build investments that will generate growth in the future.
This means that the opportunity costs of not developing her land are high, as you know. We
must not waste these opportunities. We must develop a solid strategy for investment and
growth.
Action must be taken immediately to assure our citizens that Matildaville has a sound
economic future. I must have a summary of your investment strategy for developing Ms.
Grey’s property on my desk ASAP. The plan must include a solid defense of its potential for
meeting the economic needs of the City that are outlined above. Please provide this
summary in the form of a press release. If your strategy meets my approval, I will send
your press release to business leaders and the press. Given the significance of this crisis and
its impact on my campaign for re-election, your next performance evaluation will be based
on the soundness of your strategy.
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CASE STUDIES IN PUBLIC FINANCING
Orange County—A Case Study in City Bankruptcy
Many of the issues facing Matildaville are similar to the issues faced by Orange County
in 1993 when it declared bankruptcy. Because the debt that Orange County accrued
forced decisions about investment and growth that parallel those that you must make
about Matildaville, we provide background information about the Orange County
bankruptcy. 1
In 1978, California voters passed Proposition 13, which limited the ability of local
governments to raise taxes and placed strict limits on property taxes. This severely
restricted the ability of local governments to generate revenues. In response,
governments convinced the state legislature to reduce the restrictions on investments
that local governments could undertake. As a result, local governments were permitted
to undertake high-risk, high-interest investments. Once Prop 13 placed severe
restrictions on traditional methods of financing local governments, the high-yield
investments became an attractive alternative for generating revenues.
The county treasurer in Orange County, Bob Citron, was in charge of the county’s
investment pool. Citron had a track record of providing high-interest income to his
local government investors by borrowing money and investing it in derivatives,
inverse floaters, and long-term bonds that paid high yields. He continued his pattern
of borrowing more money with borrowed money, and by 1994 Citron had borrowed $2
for every $1 on deposit. He took increasing risks in order to raise more interest income
for local governments as the state cut tax allocations. Most specifically, as the Federal
Reserve Board kept raising interest rates, Citron, who had a hunch that the Fed would
lower interest rates at the end of the year, kept buying securities.
By spring 1994 the county had suffered huge losses and did not have the cash to pay
back the massive short-term loans to the Wall Street firms from which it had borrowed
money. By 1994 county officials realized that Citron had lost about $1.64 billion in
government funds through risky investments. The county did not have enough cash on
hand to withstand a run on the money owed to Wall Street investors and local
government depositors. As a result they sought and secured Citron’s resignation.2
1 More extensive coverage of Orange County is contained in Bladassare, Mark. 1998. When Government Fails,
Berkeley: University of California Press.
2 There was no evidence that Bob Citron was personally profiting from the securities transactions. He did commit
crimes when he misappropriated profits and losses from the local governments to the county fund.
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County officials tried to sell risky securities. Banks that had loaned Citron money
threatened to seize the securities from the county pool that was held as collateral. After
the first bank took this action, the county government declared bankruptcy as a way of
halting other funds from being seized by Wall Street lenders and local government
depositors.3 As a consequence, funds that had been part of the investment pool were
frozen in 29 of the 31 cities in Orange County, all of its school districts, and most of the
transportation, water, and sanitation agencies.
During the period immediately after the bankruptcy, county supervisors tried to keep
the county government functioning. At the same time, they attempted to limit a
financial depletion of the county pool of money, which was vulnerable to further
income loss if interest rates rose again. Officials from schools, cities, and special
districts sought to assess the damage that the bankruptcy inflicted on their operations.
Immediately, the county’s credit rating fell to “junk” status.
Quickly, the county government took several immediate steps to stabilize the situation:
• Risky investments were sold, and the loss was stabilized at $1.64 billion.
• Local governments were allowed to withdraw some of their funds from the pool on
an emergency basis.
• County programs received the funding that they needed to operate, and a first
round of budget cuts was implemented.
In March 1995, the County Board of Supervisors placed on the ballot a proposal for a
half cent sales tax increase as part of the financial recovery plan. The supervisors took
this action because an additional $1 billion in bonds was coming due in the summer
and the county had no way to borrow money to repay the bonds. In overwhelming
numbers, however, local voters defeated the sales tax increase. The state governor
refused to bailout the county and threatened a state takeover. Bond investors agreed to
roll over the county’s debts for another year in exchange for more interest earnings (i.e.
interest rates increased).
By the end of 1995, the county diverted tax funds from other county agencies to the
general fund so that the county could borrow the money to pay bondholders and
vendors. Local governments that had lost money agreed to wait for resolution of the
county’s lawsuits against Wall Street firms to be paid back in full. By mid 1996, the
county government had sold the $880 million of county bonds at a loss so that it could
pay off its debts. The Orange County bankruptcy officially ended on June 12, 1996.
3 The bankruptcy did not stop seizures by Wall Street lenders and, as of 1998, numerous law suits remain pending
against Wall Street firms. These lawsuits are the primary hope of alleviating the fiscal problems of Orange County.
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Results of the bankruptcy are far reaching.
• The county government had to take on a large level of long-term debt to resolve its
fiscal problems.
• The county’s bonds are rated as speculative, meaning that the county pays a high
cost for borrowing money (i.e. interest rates on bonds are relatively high).
• Local governments are still owed money from the county pool and remain about
$850 million short.
• Services to the county’s poor were cut drastically and never fully restored.
• The local governments are severely limited in their ability to respond to current
needs or to plan for the future.
The Oakland Raiders—An Example of Misinformation and Miscalculations in the
Public Sector
In 1995, the City of Oakland and the County of Alameda hastily approved a record
$198 million deal to return the Raiders football team to Oakland and to renovate the
aging Coliseum stadium. Citing an outdated survey on fan support, politicians argued
that sufficient support from fans existed to pay the debt on the bonds issued for the
deal by using “personal seat licenses” (PSLs).4 On the contrary, the entire deal has been
losing money since its inception. Problems include:
• PSLs never gained their predicted popularity. As of 1998, many fans who initially
purchased PSLs did not opt to renew their plans.
• As of 1998, the team has yet to have a winning season, making it difficult to sell
PSLs and to fill the stadium.
• When the city and county sued the Raiders, the team counter-sued and alleged that
the City of Oakland lured them back unfairly.
• In fiscal year 1997-1998, shared payment for debt on the deal cost the city and
county $16 million. The cost for 1998-1999 is expected to be a combined $21 million,
a figure that could escalate when legal cases are settled.
4 Personal seat licenses (PSLs) are a way in which fans can assure their place at the games by paying to reserve a
specific seat.
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Appendix V:
Assessment Rubric
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RUBRIC
We have provided a rubric for the assessment of the investment strategy. We intentionally
designed this rubric to allow for flexibility in its application. In its current form, the
rubric does not contain a great deal of detail. As the teacher, you can augment the
structure with additional criteria for evaluation, if you wish. The rubric is designed for
evaluating an individual student, but you can easily modify it for the evaluation of group
activities.
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RUBRIC FOR WRITTEN ASSIGNMENT
Total: 100 points
Content—70 points
Components
Points
Define Problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
The student defined the problem with a well-reasoned cause and effect to
show an understanding of the consequences and benefits of investment
and economic growth.
Economic Accuracy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
The investment strategy uses accurate information, is well justified, and
shows an understanding of key topic components (topic components
worth five points each).
•
•
•
•
•
Investment potential realized
Cash flow maintained
Future economic growth ensured
Interest rates increased minimally
Concepts used appropriately
Solutions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
The student used knowledge of economics and of the problem to select
and justify the investment strategy (components worth ten points each).
• It fit the problem
• It was adequately justified/defended
• It contained correct information
Presentation, Organization, and Format—30 points
Components
Well-organized press release . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Writing is clear and effective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Appropriate vocabulary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Mechanically perfect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
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Appendix VI:
Test Bank
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Test Bank for Matildaville
The following questions are taken from Soper, John C. and William B. Walstad. 1987. Test of Economic Literacy (2nd
edition). NY: Joint Council on Economic Education.
* indicates the correct answer.
1. The opportunity cost of a new public high school is the:
A.
B.
C.
D.
money cost of hiring teachers for the new school
cost of constructing the new school at a later date
change in the annual tax rate to pay for the new school
other goods and services that must be given up to build the new school*
2. Sandy Smith can take a job paying $10,000 a year when she graduates from high school, or
she can go to college and pay $5,000 a year for tuition. Measured in dollars, what is her
opportunity cost of going to college next year?
A.
B.
C.
D.
$0
$5,000
$10,000
$15,000*
3. Suppose you want to increase the productivity of labor. Which of the following policies
would help do this?
A.
B.
C.
D.
Discourage the use of labor-saving technology.
Increase pollution control requirements.
Encourage capital investment.*
Spend less on education.
4. “Americans are a mixed-up people. Everyone knows that baseball is far less necessary than
food and steel. Yet they pay ballplayers a lot more than farmers and steelworkers.” Why?
A.
B.
C.
D.
The employers of the ballplayers are monopolists.
Ballplayers are really entertainers rather than producers.
There are fewer professional ballplayers than farmers or steelworkers.
Good ballplayers are more scarce, given the demand for their services.*
5. Of the following, which is the most general cause of low individual incomes in the United
States?
A.
B.
C.
D.
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lack of valuable productive services to sell*
discrimination against nonunion workers
unwillingness to work
progressive tax rates
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6. In a market economy, high wages depend mostly on:
A.
B.
C.
D.
minimum wage laws
actions of government
high output per worker*
socially responsible business leaders
7. Three major factors of production are natural, human, and capital resources. Which of the
following groups best illustrates these three factors?
A.
B.
C.
D.
rent, workers, and money
oil, taxi drivers, and bonds
iron ore, teachers, and trucks*
farmers, investors, and manufacturers
8. The limit of an economy’s potential output at any time is set by:
A.
B.
C.
D.
the quantity and quality of labor, capital, and natural resources*
business demand for final goods and services
government regulations and spending
the amount of money in circulation
9. If Britain has a comparative advantage over France in the production of cars, then:
A.
B.
C.
D.
There are no gains from specialization and trade in cars between Britain and France.
The opportunity cost of producing cars in Britain is higher than in France.
The opportunity cost of producing cars in Britain is lower than in France.*
Britain will benefit from a decline in the demand for cars.
10. To promote economic growth, a developing country must:
A.
B.
C.
D.
increase investment*
increase consumption
use the market system
use central economic planning
______________________________________________________________________________________________________
The following questions are from Marlin, Matthew; Turley Mings and Diane Swanson. 1995. Teaching and Testing from
The Study of Economics: Principles, Concepts and Applications (5th edition). Guilford, Connecticut: Dushkin Publishing
Group/Brown and Benchmark Publishers.
11. A firm’s ability to undertake the economic function of “real capital investment” will be
directly related to which of the following?
A.
B.
C.
D.
the efficiency of product markets
the level of household savings*
the elasticity of demand for stocks
the structure of industry
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12. Which of the following is the same as the normal rate of return?
A.
B.
C.
D.
the short-run profit on invested capital
the long-run profit on invested capital
the opportunity cost of invested capital*
the variable cost of invested capital
13. Which of the following supports concerns about the future availability of human capital in
the United States?
A.
B.
C.
D.
the low savings rate in the United States
the short time horizon of U.S. businesses
the emphasis on making money instead of making goods
the declining relative performance of U.S. school children in math and science*
14. Why do governments subsidize higher education in state universities?
A.
B.
C.
D.
Governments can produce education more efficiently than the private sector.
Because it is a collective good, the private sector cannot produce higher education.
Higher education is associated with substantial external economies.*
It is necessary for government intervention in order to internalize externalities.
15. As a result of new capital investment, the demand for labor:
A. decreases because employers substitute capital for labor
B. increases because more capital makes workers more productive
C. can decrease because employers substitute capital for labor, but it can also increase
because more capital makes workers more productive*
D. does not change
16. Which of the following is not a factor that contributes to an unequal distribution of
households’ income?
A.
B.
C.
D.
differences in asset ownership
differences in worker productivity
differences in opportunity*
differences in interest rates
17. Differences in productivity among workers depends upon each of the following except:
A.
B.
C.
D.
race and/or gender*
ability
available capital
education and training
18. Which of the following is a program designed to reduce poverty by increasing economic
opportunity?
A.
B.
C.
D.
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low-interest student loans*
food stamps
Social Security
transfer programs
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19. Which of the following contributes to improved productivity?
A.
B.
C.
D.
increased technology
a better trained labor force
new capital investment
all of the above*
20. Being more responsive to social concerns may often lead to a tradeoff between this and:
A.
B.
C.
D.
obeying the law
maintaining a flexible work force
pursuing economic goals*
increasing the level of capital investment
21. Which of the following has had the most impact on forcing U.S. businesses to increase their
responsiveness to social concerns?
A.
B.
C.
D.
consumers’ low opinion of product quality
public opinion and the threat of boycotts*
decreasing productivity in the U.S. economy
all of the above
22. Improvements in human capital will affect which of the following?
A.
B.
C.
D.
the total revenue of the firm
the elasticity of demand for the firm’s products
the firm’s variable costs*
the cost of capital for the firm
23. State and local government are generally allowed to borrow money:
A. in order to cover expenses when tax revenues are not large enough to meet all
expenditures
B. just like the federal government does
C. only to finance specific projects*
D. to meet everyday expenses
24. Which of the following state and local expenditure categories has been hard hit by a
shortage of funds in recent years?
A.
B.
C.
D.
education
transportation
pollution control systems
all of the above*
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25. Which of the following is a true statement?
A. Capital investment is positively related to interest rates and negatively related to
productivity.
B. Capital investment is positively related to interest rates and positively related to
productivity.
C. Capital investment is negatively related to interest rates and negatively related to
productivity.
D. Capital investment is negatively related to interest rates and positively related to
productivity.*
26. Increased investment in capital equipment is the key ingredient in which of the following?
A.
B.
C.
D.
improved product quality
increased market share
higher profits
increased productivity*
27. Which of the following contributed to the cost of the slow rate of capital investment in the
United States during the 1980s?
A.
B.
C.
D.
The demand for capital goods exceeded the supply of capital goods.
Fixed costs were more important than variable costs.
The demand for capital goods is elastic with respect to the interest rate.
Capital investment and interest rates are directly related.*
28. “High interest rates are one cause of decreased capital investment.” This statement implies
which of the following?
A.
B.
C.
D.
The demand for capital goods exceeds the supply of capital goods.
Fixed costs are more important than variable costs.
The demand for capital goods is elastic with respect to the interest rate.*
Capital investment and interest rates are directly related.
29. Which of the following is a true statement?
A. Investment in capital equipment is directly related to productivity and inversely
related to economic growth.
B. Investment in capital equipment is directly related to productivity and directly
related to economic growth.*
C. Investment in capital equipment is inversely related to productivity and directly
related to economic growth.
D. Investment in capital equipment is inversely related to productivity and inversely
related to economic growth.
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