Chapter 1 Flashcards
The study of personal finance includes…
Cash management, Risk management, and retirement planning.
What do you have to restrain in order to achieve financial objectives?
Current Consumption
What is financial success defined as?
The achievement of financial aspirations that are desired.
What is the easiest for a person to forecast?
Income
What is the preferred phase of the economic cycle?
Expansion
What is the economic phase with conditions making it easy for consumers to buy homes, cars, and other goods?
Expansion
Prior to which phase of the economic cycle does interest rates and inflation climb?
Recession
When is a good time in the economy to buy stock?
In the trough of a recession
What are the two statistics one should track to understand the direction of the economy?
The gross domestic product and the index of leading economic indicators.
What is the gross domestic product?
The statistic that measures the value of all goods and services produced in the United States.
What is a signal that economic growth will slow in the months ahead?
A falling index of leading economic indicators for three or more consecutive months.
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?
10.0 percent
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?
$25,000
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?
Corky’s increase in real income was $745.
The U.S. government measures inflation using what?
The consumer price index.
What is personal inflation rate?
The rate of increase in prices of items purchased by an individual or family.
For whom is it good news the the inflation rate is rising?
Nobody
Why does rising interest rates depress stock prices?
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.
What is the one key interest rate to focus on when trying to forecast interest rates in the future?
Federal funds rate.
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?
The opportunity cost
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?
Marginal Utility
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?
$935
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?
The tax-exempt bond.
Most people save for what type of goals by putting away a series of payments?
Long-term
What is Present Value?
The current value of an asset that will be received in the future.
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?
7.2 percent
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?
18 years
Which form of compensation is NOT considered an employee benefit?
Commissions
When contemplating taking a job or switching jobs, what should be considered?
Comparing salary offers from employers located in cities that have different costs of living, Flexible spending accounts, and employer-sponsored qualified retirement plans.
What is a flexible spending account (FSA)?
it is pretex set aside, a government-approved plan, and an expense reimbursement account.
What does paying expenses with pretex dollars allow?
Lowers taxable income, decreases take-home pay, and increases effective take-home pay because of the reimbursement.
What is NOT a drawback when participating in an FSA?
IRS regulations allow the plan to return unused amounts at the end of the year.
What is the most popular qualified retirement plan?
401(k)
When are interest, dividends, and capital gains from qualified retirement plans taxed?
Only after funds are withdrawn from the plan.
Which is NOT considered an advantage when participating in employer-sponsored qualified retirement plans?
Withdrawals are tax-free.
Which of the following is a possible method of maximizing benefits from a tax-sheltered retirement plan?
Start early to boost your retirement, plan to be a millionaire, and never make a hardship withdrawal from a tax-sheltered retirement plan.
