Chapter 1

Question 1

The study of personal finance includes…

Answer 1

Cash management, Risk management, and retirement planning.

Question 2

What do you have to restrain in order to achieve financial objectives?

Answer 2

Current Consumption

Question 3

What is financial success defined as?

Answer 3

The achievement of financial aspirations that are desired.

Question 4

What is the easiest for a person to forecast?

Answer 4

Income

Question 5

What is the preferred phase of the economic cycle?

Answer 5

Expansion

Question 6

What is the economic phase with conditions making it easy for consumers to buy homes, cars, and other goods?

Answer 6

Expansion

Question 7

Prior to which phase of the economic cycle does interest rates and inflation climb?

Answer 7

Recession

Question 8

When is a good time in the economy to buy stock?

Answer 8

In the trough of a recession

Question 9

What are the two statistics one should track to understand the direction of the economy?

Answer 9

The gross domestic product and the index of leading economic indicators.

Question 10

What is the gross domestic product?

Answer 10

The statistic that measures the value of all goods and services produced in the United States.

Question 11

What is a signal that economic growth will slow in the months ahead?

Answer 11

A falling index of leading economic indicators for three or more consecutive months.

Question 12

Dick mitchell received a $3000 raise this year. This increased his salary as an associate TV producer from $30,000 to $33,000. What percentage increase in nominal income did Dick receive?

Answer 12

10.0 percent

Question 13

If your income increased from $23,000 to $26,000 during a period when the rate of inflation was 4 percent, what was your real income after the raise?

Answer 13

$25,000

Question 14

Corky, a college teaching assistant, received a raise of $1000 from $12,000 to $13,000 this year. If inflation was 2 percent over the same period, which of the following is true?

Answer 14

Corky’s increase in real income was $745.

Question 15

The U.S. government measures inflation using what?

Answer 15

The consumer price index.

Question 16

What is personal inflation rate?

Answer 16

The rate of increase in prices of items purchased by an individual or family.

Question 17

For whom is it good news the the inflation rate is rising?

Answer 17

Nobody

Question 18

Why does rising interest rates depress stock prices?

Answer 18

Because businesses pay more when they borrow, thereby reducing profits, future earnings will not be worth as much as today, and stock investors are lured away to interest-paying investments.

Question 19

What is the one key interest rate to focus on when trying to forecast interest rates in the future?

Answer 19

Federal funds rate.

Question 20

Kurt spent $80 on a new sweater rather than using this money to buy his personal finance textbooks. The cost of doing without the textbooks is called what?

Answer 20

The opportunity cost

Question 21

Jack and Marsha are trying to decide if living 10 miles closer to their work is worth the extra $5,000 in the cost of the house. Which decision-making concept are they using?

Answer 21

Marginal Utility

Question 22

Raymond just received a $1500 Christmas bonus from his employer. If he pays a 27 percent marginal tax rate for federal income taxes, his state income tax is 3 percent, and the Social Security tax rate is 7.65 percent, approximately how much of the $1500 bonus will Raymond have left to spend on Christmas presents?

Answer 22

$935

Question 23

Jerri is in the 30 percent marginal tax bracket. She can earn $500 investing in a taxable bond or $375 investing in a tax-exempt bond. Which of these bonds provide her with the most after-tax income?

Answer 23

The tax-exempt bond.

Question 24

Most people save for what type of goals by putting away a series of payments?

Answer 24

Long-term

Question 25

What is Present Value?

Answer 25

The current value of an asset that will be received in the future.

Question 26

Paul invested $10,000 in a security that will double in value in ten years. Approximately what annual rate of return is this investment making?

Answer 26

7.2 percent

Question 27

Over the past few years, the price of houses has been increasing at an annual rate of 4 percent nationally. How many years will it take for costs to double at this rate?

Answer 27

18 years

Question 28

Which form of compensation is NOT considered an employee benefit?

Answer 28

Commissions

Question 29

When contemplating taking a job or switching jobs, what should be considered?

Answer 29

Comparing salary offers from employers located in cities that have different costs of living, Flexible spending accounts, and employer-sponsored qualified retirement plans.

Question 30

What is a flexible spending account (FSA)?

Answer 30

it is pretex set aside, a government-approved plan, and an expense reimbursement account.

Question 31

What does paying expenses with pretex dollars allow?

Answer 31

Lowers taxable income, decreases take-home pay, and increases effective take-home pay because of the reimbursement.

Question 32

What is NOT a drawback when participating in an FSA?

Answer 32

IRS regulations allow the plan to return unused amounts at the end of the year.

Question 33

What is the most popular qualified retirement plan?

Answer 33

401(k)

Question 34

When are interest, dividends, and capital gains from qualified retirement plans taxed?

Answer 34

Only after funds are withdrawn from the plan.

Question 35

Which is NOT considered an advantage when participating in employer-sponsored qualified retirement plans?

Answer 35

Withdrawals are tax-free.

Question 36

Which of the following is a possible method of maximizing benefits from a tax-sheltered retirement plan?

Answer 36

Start early to boost your retirement, plan to be a millionaire, and never make a hardship withdrawal from a tax-sheltered retirement plan.