Major Consumer Decisions, Term 2.

Question 1

Define loan.

Answer 1

A thing that is borrowed, especially a sum of money that is expected to be paid back with interest.
An amount of money that consumers borrow from a lender with the agreement it will be paid back. The amount of money borrowed is called the principal. Loans can be paid back in a lump sum or as payments spread over time.

Question 2

Define collateral.

Answer 2

Something pledged as security for repayment of a loan, to be forfeited in the event of a default.
A financial asset that can be used as payment if the borrower is unable to pay back the loan. If a borrower doesn’t make payments, the lender can put a lien on the collateral.

Question 3

Define lien.

Answer 3

A right to keep possession of property belonging to another person until a debt owed by that person is discharged.
A lien is the lenders right to claim the collateral until the loan is paid.

Question 4

Define APR.

Answer 4

The total cost of borrowing money that consumers rely to compare loans. The Annual Percentage Rate (APR) is the cost you pay each year to borrow money, including fees, expressed as a percentage. (Annual Interest Rate)

Question 5

Define principal.

Answer 5

The amount of money borrowed.

Question 6

Define creditor

Answer 6

A creditor is a party that has a claim on the services of a second party. It is a person or institution to whom money is owed.

Question 7

Define lender.

Answer 7

A lender is an individual, a group (public or private), or a financial institution that makes funds available to a person or business with the expectation that the funds will be repaid.

Question 8

Define default / defaulting.

Answer 8

Default is the failure to make required interest or principal repayments on a debt, whether that debt is a loan or a security.

Question 9

Define serviceability.

Answer 9

The quality of being able to provide good service.

Question 10

Define interest rates.

Answer 10

The interest rate is the percentage people are charged when they borrow money from a bank or lender.

Question 11

Define disposable income.

Answer 11

Income remaining after deduction of taxes and social security charges, available to be spent or saved as one wishes.

Question 12

Define purchasing power.

Answer 12

The financial ability to buy products and services.

Question 13

Define social costs.

Answer 13

The total cost to society. It includes private costs plus any external costs.

Question 14

Define economic costs.

Answer 14

The cost in money, time, and other resources needed in order to do something or make something. The sum of all explicit and implicit (opportunity) costs of the business firm.

Question 15

Define hyperinflation.

Answer 15

Inflation occurring at a very high rate.

Question 16

Define upwards inflationary pressures.

Answer 16

The underlying causes of inflation. These pressures are the reason that the production of goods increases to meet or exceed consumer demand or that prices increase due to lack of supply.
Excessive growth of total demand for goods and services has maintained intense upward pressure on prices.

Question 17

Define downwards inflationary pressures.

Answer 17

Deflationary pressures imply a fall in aggregate demand. This leads to a lower rate of growth or a fall in GDP and consequently a lower inflation rate. Strong deflationary pressures may also cause inflation to become negative. i.e. a fall in prices known as deflation.

Question 18

Define debt.

Answer 18

A sum of money that is owed or due.

Question 19

Define deficit.

Answer 19

The amount by which something, especially a sum of money, is too small.
When money spent is exceeding the income.

Question 20

Define inflation.

Answer 20

A general increase in prices and fall in the purchasing value of money.

Question 21

Define open-ended loans.

Answer 21

A loan that does not have a definite end date. The terms are based on an individual’s credit score. They allow borrowers to continue adding purchases up to a set credit limit and borrowers are to make monthly. Consumers can continue to use them repeatedly until the account is closed or a limit agreed upon is reached. Interest may only apply if the principal is not paid back within a certain period.

Eg. Home equity loans, credit cards.

Question 22

Define closed-ended loan.

Answer 22

A loan or type of credit where the funds are dispersed in full when the loan closes and must be paid back, including interest and finance charges, by a specific date. The loan may require regular principal and interest payments, or it may require the full payment of principal at maturity.
One-time loans for a fixed amount and borrowers make regular payments towards the balance. With each payment, the balance of the loan decreases until it is paid in full. They have a fixed interest rate and require the borrower to pay back the principal and interest with a specific time frame.

Eg. Home mortgage, car loans.

Question 23

Define secured loans

Answer 23

A loan backed up by collateral that you own.
Debt products that are protected by collateral. This means that when you apply for a secured loan, the lender will want to know which of your assets you plan to use to back the loan. The lender will then place a lien on that asset until the loan is repaid in full.

Question 24

Define recession

Answer 24

a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP

During a recession, the economy struggles, people lose work, companies make fewer sales and the country’s overall economic output declines. The point where the economy officially falls into a recession depends on a variety of factors.

Question 25

Define credit score

Answer 25

A credit score is a number (usually 1-1000) /indicator of a person’s creditworthiness, or their ability to repay debt. It is usually expressed as a number based on the person’s repayment history and credit files across different loan types and credit institutions. Credit score is also known as a credit rating.

Question 26

Define a Home Equity Loan

Answer 26

A home equity loan allows you to borrow against the equity you have in your home to invest in shares or property, repay your debts, renovate or pay for lifestyle expenses. House prices have risen rapidly across most of Australia, giving home owners a readily available and inexpensive source of credit.

Question 27

How does National Debt affect us?

Answer 27

At some point, investors might begin to doubt the government’s ability to repay debt and could demand even higher interest rates — further raising the cost of borrowing for businesses and households. Over time, lower confidence and reduced investment would slow the growth of productivity and wages

Question 28

Why is National Debt an issue?

Answer 28

the risk of a country defaulting on its debt service obligation increases, the country loses social, economic, and political power. This, in turn, makes the national debt level a national security issue.

Question 29

What are the effects of high interest rates?

Answer 29

When interest rates are rising, both businesses and consumers will cut back on spending. This will cause earnings to fall and stock prices to drop. On the other hand, when interest rates have fallen significantly, consumers and businesses will increase spending, causing stock prices to rise

The RBA aims for a 2-3% interest rate.

Question 30

Define surplus

Answer 30

an amount of something left over when requirements have been met; an excess of production or supply.

eg. when you invest $1000 into stocks and you get a $1500 return. There is a surplus of $500. It’s practically the opposite of a deficit.

Question 31

Name 3 internal factors that influence consumer spending

Answer 31

Personal factors:

• Age
• Income
• Occupation
• Lifestyle
• Personality

Psychological factors:

• Motivation
• Perception
• Learning
• Beliefs and religion

Question 32

Name 3 external factors that influence consumer spending

Answer 32

Cultural factors:

• Culture
• Sub-class
• Social class

Social factors:

• Family
• Reference group
• Role and status

Question 33

Define situational factor

Answer 33

Situation influences include the consumer’s immediate buying task, the market offerings that are available to the consumer, and demographic traits

Question 34

Whats the link between interest rates and inflation?

Answer 34

In general, higher interest rates are a policy response to rising inflation. Conversely, when inflation is falling and economic growth slowing, central banks may lower interest rates to stimulate the economy.

Question 35

What are the effects of low interest rates?

Answer 35

Lower interest rates push investors into riskier assets and argue for higher prices on property and shares, asset gains that tend to boost inequality. More tellingly, negative policy rates helped push bond prices so high that yields went negative.

Question 36

Why are the effects of low inflation?

Answer 36

Very low inflation usually signals demand for goods and services is lower than it should be, and this tends to slow economic growth and depress wages. This low demand can even lead to a recession with increases in unemployment – as we saw a decade ago during the Great Recession.

Question 37

Why are the effects of high interest?

Answer 37

The problem is the main way it does that is by raising interest rates, which slows the economy. If the RBA is forced to raise interest rates too quickly, it can even cause a recession and result in higher unemployment

Question 38

What are the impacts of debt on an individual? State the advantages and disadvantages.

Answer 38

disadvantage:

• affect people’s welfare, particularly their mental health
• influence their attitudes and how they make decisions.
• take years to pay it off

advantage:

• the ability to pay off high-cost debt, reducing monthly payments by hundreds or even thousands of dollars.
• allows a business to leverage a small amount of money into a much larger sum, enabling more rapid growth than might otherwise be possible

Question 39

Define bankruptcy

Answer 39

Bankruptcy is a legal process where you’re declared unable to pay your debts. It can release you from most debts, provide relief and allow you to make a fresh start. You can enter into voluntary bankruptcy. To do this you need to complete and submit a Bankruptcy Form.

This means that all your income will go immediately to repaying your debts. This also leaves limits to your collateral, such as caps to how expensive your car can be.

This process usually lasts 3 years and 1 day.