Friday, January 13, 2006

The Yield Curve as a Tool in High School Economics

I'm not sure how many high school economics teachers use the yield curve in their classes. I'm not even sure how many high school economics teachers are confident enough that they understand the yield curve to bring it up. I suspect that those who are teaching Advanced Placement Economics are certainly doing so. Beyond that...I'm not certain. I know I wasn't comfortable doing so. I understood the idea. But back when I was teaching in high school, I just wasn't sure I could explain it adequately.

The current yield curve certainly poses a problem for professionals at all levels. There is some value to the position stated in the article at by John Berry. He cites a Goldman-Sachs economist, who states that part of the reason for the current state of the curve has to do with the Fed's credibility in keeping inflation under control. That, in turn, means that lenders are accepting a smaller inflation premium for the long-term.

One might also wonder to what extent the curve reflects a desire among anxious or conservative lenders to find a low-risk investment. It may be that people seeking treasury securities are willing to forgo some return in order to get a lower risk of default. Certainly, U.S. Treasuries could be seen as filling that need, given their track record.

How do you explain the situation to your students? Or do you not even discuss the yield curve?

Posted by TSchilling at January 13, 2006 7:29 PM

I am with you on teaching the yield curve. I do teach the yield curve--it really isn't covered well in the book--but I am rarely satisfied the kids understand the concept of the curve. In addition, just the mention of the yield curve causes eyes to glaze. I do remember one year in Fed Challenge at the District competition I had one student completely prepared to discuss the curve. A bright young man who independently augmented his understanding of the yield curve. Yet, there was no question on the yield curve and he commented on the way home: "No one cares about the yield curve!"

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