Chapter 1

Question 1

Personal Finance

Answer 1

The study of personal and family resources considered important in achieving financial success; itinvolves how people spend, save, protect, and invest their financial resources.

Question 2

Financial Literacy

Answer 2

Knowledge of facts, concepts, principles, and technological tools that are fundamental to being smart about money.

Question 3

Financial Well-being

Answer 3

A state of being wherein a person can fully meet current and ongoing finan- cialobligations, can feelsecure intheir financial future, and make choices that allow them to enjoy life.

Question 4

Financially Responsible

Answer 4

Means that you are accountable for your future financial well-being and that you strive to make wise personal financial decisions.

Question 5

Savings

Answer 5

Income not spent on current consumption.

Question 6

Investments

Answer 6

Assets purchased with the goal of providing additional future income from the asset itself.

Question 7

Standard of Living

Answer 7

Material well-being and peace of mind that individuals or groups earnestly desire and seek to attain, tomaintain ifattained, topreserve ifthreatened, and to regain iflost.

Question 8

Level of Living

Answer 8

Refers to the level of wealth, comfort, material goods and necessities one is currently living.

Question 9

Obsolete Knowledge

Answer 9

That which we believe may have been valid at one time, ifitever was true in the firstplace.

Question 10

Capitalism

Answer 10

Here a country’s economy, its trade and industry, are controlled by private owners who see profit.

Question 11

Economic Growth

Answer 11

A condition of increasing production (business spending) and consumption (consumer spending) in the economy and hence increasing national income.

Question 12

Business Cycle / Economic Cycle

Answer 12

Business cycles can be depicted as a wavelike pattern of rising and falling economic activity; the phases of the business cycle include expansion, peak, contraction (which may turn into recession), and trough.

Question 13

Deleveraging

Answer 13

A time period when credit use shrinks inan economy instead ofexpanding as during normal economic times.

Question 14

Recession

Answer 14

A recurring period of decline in total output, income, employment, and trade, usually lasting from six months to a year and marked by widespread contractions in many sectors of the economy.

Question 15

Economic Indicator

Answer 15

Any economic statistic, such as the unemployment rate, GDP; or the inflation rate, that suggests how well the economy is doing now and how well the economy is doing now and how well it might be doing in the future.

Question 16

Gross Domestic Product (GDP)

Answer 16

The nations broadest measure of economic health; it reports how much economic activity (all goods and services) has occurred within the U.S border during a given period.

Question 17

Leading Economic Indicators

Answer 17

Statistics that change before the economy changes, thus helping predict how the economy will do in the future, such as the stock market, the number of new building permits, and the consumer confidence index.

Question 18

Index of Leading Economic Indicators (LEI)

Answer 18

Four composite index reported monthly by the Conference Board that suggests the future direction of the U.S. economy.

Question 19

Inflation

Answer 19

The process by which the cost
of goods and services tends to rise over time.

Question 20

Consumer Price Index

Answer 20

A broad measure of changes in the process of all goods and services purchased for consumption by urban households.

Question 21

Real Income

Answer 21

Income measure in constant prices relative to some base time period. It reflects the actual buying power of the money you have measured in constant dollars.

Question 22

Nominal Income

Answer 22

Also called money income; income that has not been adjusted for inflation and decreasing purchasing power.

Question 23

Purchasing Power

Answer 23

Measure of the goods and services that one’s income will buy.

Question 24

Rule of 70

Answer 24

A formula to determine how long it will take for the value of a dollar to decline by one half.

Question 25

Deflation

Answer 25

A broad, sustained decline in prices of goods and services that ishard to stop once ittakes hold, causing less consumer spending, lower corporate profits, declining home values, rising unemployment, and lower incomes.

Question 26

Interest

Answer 26

The price of borrowing money.

Question 27

Fed

Answer 27

The federal reserve board, an agency of the federal government.

Question 28

Federal Funds Rate

Answer 28

The short-term rate at which banks lend funds to other banks overnight so that the borrowing bank has sufficient reserves as mandated by the FED.

Question 29

Sharing Economy

Answer 29

Refers to person- to-person (P2P) sharing of access of goods and services where owners rent out something they are not using, such as a car, house, or bicycle to a stranger.

Question 30

Opportunity Cost

Answer 30

The opportunity cost of any decision is the value of the next best alternative that must be forgone.

Question 31

Trade off

Answer 31

Giving up one thing for another.

Question 32

Marginal Utility

Answer 32

The extra satisfaction derived from gaining one or more incremental unit of a product or service.

Question 33

Marginal Cost

Answer 33

The additional (marginal) cost of one more incremental unit of some item.

Question 34

Marginal Tax Rate

Answer 34

The tax rate at which your last dollar, earned is taxed, and it refers to the highest tax bracket that your taxable income pays you.

Question 35

Tax-exempt Income

Answer 35

Income from an investment whose earnings are free, or exempt, from taxation.

Question 36

Tax sheltered Income

Answer 36

Income that islegitimately exempt
from income taxes and may or may not be subject to taxation in a later tax year.

Question 37

Time Value Of Money

Answer 37

A method by which one can compare
cash flows across time, either as what
a future cash flow is worth today
(present value) or what an investment
made today will be worth in the
future (future value). Also, the cost of
money that is borrowed or lent; it is
commonly referred to as interest and
adjusts for the fact that dollars to be
received or paid out in the future are
not equivalent to those received or
paid out today

Question 38

Principle

Answer 38

The original amount invested.

Question 39

Compound Interest

Answer 39

Compound interest is earning of
interest on interest and arises when
interest is added to the principal so
that, from that moment on, the in-
terest that has been added also earns
interest.

Question 40

Compounding

Answer 40

The addition of interest to principal;
the effect of compounding depends
on the frequency with which interest
is compounded and the periodic
interest rate that is applied.

Question 41

Future Value

Answer 41

The valuation ofan asset projected to the end of a particular time period in the future.

Question 42

The Rule Of 72

Answer 42

A simple formula for figuring the number of years it takes to double the principal using compound interest.

Question 43

Cafeteria Plan

Answer 43

A type of employee benefit plan
where employees are offered a choice between cash (which istaxable) and at least one other nontaxable benefit, which are qualified as nontaxable or tax-sheltered benefits.

Question 44

Flexible Spending Account

Answer 44

An employer-sponsored account that allows employee-paid expenses for medical or dependent care to be paid with an employee’s pretax dollars rather that after-tax income.

Question 45

Pretax Dollars

Answer 45

Money income that has not been taxed by the government.

Question 46

Health Care Plans

Answer 46

An employee benefit designed to pay all or part of the employee’s medical expenses.

Question 47

High-deductible Health Plan

Answer 47

A plan that requires individuals to pay a higher deductible to cover medical expenses before insurance plan payments begin; chosen to save money on premiums.

Question 48

Deductible

Answer 48

An initial portion of any loss that must be paid before collecting insurance benefits.

Question 49

Health Savings Accounts (HSAs)

Answer 49

Special savings account intended for people who have a high-deductible health care plan (with annual deductibles of at least $ 1,000 for individuals and 2,000 for families).

Question 50

Tax-sheltered Retirement Plan

Answer 50

Employer-sponsored, defined contribution retirement plans including 401k plans and similar 403b and 457 plans.

Question 51

Match

Answer 51

An employer may voluntarily contribute a certain amount of money to an individual’s retirement account according to the amount the employee contributes

Question 52

Nudge

Answer 52

Policies of employers and/or the government to help get consumers to do what is good for them.

Question 53

Financial Planner

Answer 53

An investment professional who evaluates the personal finances of an individual or family and recommends strategies to set and achieve long-term financial goals.

Question 54

Investment Policy Statement

Answer 54

Investment Policy Statement A written document that spells out the relationship between an investor and his or her financial advisor and guides how the advisor will invest the persons money; it should detail the persons investment philosophy, financial situation, and the risks he or she is willing to take, as well as what tasks the advisor will perform.

Question 55

Suitability Standard

Answer 55

Financial advisers who are held to a standard for advice giving where they are free to sell securities generating the healthiest profits and commissions, as long as they are judged “suitable” for a client based on factors like age or risk tolerance.

Question 56

Fiduciary Standard

Answer 56

A financial advisor must always act in the best interest of the client at all times regardless of how it might affect the advisor.