Miscellaneous

Question 1

Recession

Answer 1

When GDP has experienced a decrease in real terms for 2 consecutive quarters or a minimum of six months from baseline of zero

Question 2

Depression

Answer 2

GDP has experienced a decrease in real terms for 6 consecutive quarters or a minimum of 18 months from baseline of zero

Question 3

Leading Indicators (definition)

Answer 3

Tend to precede actual economic change

Question 4

Leading indicator examples

Answer 4

• housing starts
• new unemployment claims
• bond yields (spread between 10 yr treasury & fed funds)
• Indexes of stock prices
• orders for durable goods
• changes in investor sentiment

Question 5

Coincident indicators (definition)

Answer 5

Those that occur simultaneously during business cycle and confirm the stage the economy is currently experiencing

Question 6

Economic indicators

Answer 6

Indicate what phase of the business cycle the economy is currently or likely to be in the future

Question 7

Coincident indicators (examples)

Answer 7

• industrial production
• level of personal income
• amount of corporate profits

Question 8

Lagging (or confirming) indicators (definition)

Answer 8

Those that usually change after the economy has passed through one business cycle and allow confirmation of a previous economic environment

Question 9

Lagging indicators (examples)

Answer 9

• prime interest rates
• changes in CPI, particularly for services
• amount of business and consumer loans outstanding
• average duration of unemployment

Question 10

Inflation

Answer 10

• defined as rise in avg. level of prices of goods and services
• two most common measures are Consumer Price Index (CPI) and Produces Price Index (PPI)

Question 11

Deflation

Answer 11

• When prices are falling in absolute terms
• Preservation of capital should be of primary concern
• investments should center on very high-quality debt instruments because interest rates fall significantly in this period and bond prices rise and purchasing power increases
• if deflation is relatively mild, selective purchases of defensive common stocks could be profitable
• if deflation severe, investor should not hold socks
• real assets typically perform poorly

Question 12

Disinflation

Answer 12

When prices are still rising, but at a declining rate

Question 13

Stagflation

Answer 13

• Combines high unemployment and high inflation (worst of both worlds)
• Due to reduction in productive output, there are few monetary or fiscal policies that can be implemented to quickly counter its effects.
• Ex. high interest rates may be offset by a contractionary monetary approach; however, that would remove money supply from economy at time where job growth and stimulation to household income are needed

Question 14

Consumer Legislation Overviews (Acts and Provisions)

Answer 14

• Fair Credit Reporting: REPORT-related
• Truth in Lending: CONTRACT-related
• Bankruptcy, general: Remains on credit report for 10 years
• Chapter 7: liquidation; must wait 8 years to refile
• Chapter 13: wage-earner (repayment) plan

Question 15

Chapter 7 bankruptcy

Answer 15

• Individual is permitted to keep certain assets, but all others are relinquished to satisfy the costs of bankruptcy and claims of creditors
• state law generally applies (vs. federal) w/ regards to property retention
• Non-dischargeable assets: student loans (unless meets “undue hardship” exception), back taxes (past 3 years), alimony and child support, and debts from “bad acts” such as fraud, misappropriation, etc.
• Protected assets: IRAs - $1,512,350, IRA rollovers - unlimited (if not commingled w/ regular IRA contributions), qualified plans - unlimited, pensions, life insurance, and annuities.
• Inherited IRAs are not protected

Question 16

Chapter 13 bankruptcy

Answer 16

• plan creator which debtor will repay outstanding debts within a specified time period (typically 3 - 5 years)
• amount is often reduced so payments become manageable
• chapter 13 is more favorable to creditor as they will still get something
• available to those whose debts total less than certain amounts and who have regular income (i.e., wage earner plan)

Question 17

Bankruptcy Act of 2005

Answer 17

• individuals able to pay their debts are required to file under Chapter 13 vs. having debts entirely canceled under Chapter 7 (typically if can pay at least $100 monthly to creditors)
• Consumer use of Chapter 7 filing is limited to the liquidation of credit card bills or loans that are not secured by house or other assets
• Debtors who want to filing Chapter 7 are required to submit to credit counseling
• Lenders are required to provide consumer info about financial dangers of paying only minimum balances on credit card debts

Question 18

Chapter 11 Bankruptcy (Reorganization)

Answer 18

• any individual, business, or corporate debtor who is eligible for Chapter 7 (except stockbroker, commodity brokers, and railroads) are eligible for Chapter 11
• Voluntary or involuntary petition may be filed, and automatic stay and entry or order for relief provisions will apply
• debtor remains in possession and may continue to operate debtor’s business
• many states have unlimited homestead exemption may allow primary residence to be maintained, but must have lived their for 40 months
• funds in education savings accounts may be retained. $5k limit per beneficiary may be applied for deposits made between 1-2 years prior to filing for bankruptcy

Question 19

John and Mary are considering filing for personal bankruptcy to discharge their major debts and have a fresh start. They have asked their financial advisor for her advice and have provided the following overview of their current financial situation: „ Combined after-tax income of $58,000 „ $1,500 monthly rent payment „ Monthly expenses (after rent) of $3,500 „ Negative net worth „ $65,000 in outstanding student loans „ $22,000 balance in revolving credit debt „ $500 monthly alimony payment to John’s former spouse „ $4,000 outstanding loan balance from Mary’s 401(k), which has a current balance of $2,000

Their financial advisor counseled them to carefully consider the ramifications of bankruptcy before filing. She pointed out that the potential pitfalls of filing for bankruptcy include the following:

Answer 19

„ There would be a negative impact on their credit rating, impacting their ability to borrow. They would also be unable to obtain a home mortgage for a considerable period of time should they decide to file. Filing for bankruptcy would also impact their relationship with other institutions that rely on credit scores, such as auto insurers who use it to help establish insurance premiums. Their bankruptcy would remain on their credit report for 10 years.
„ Chapter 7 bankruptcy is not possible because the Bankruptcy Abuse Prevention and Consumer Act of 2005 eliminated this possibility for individuals with the ability to pay at least $100 a month to creditors.
„ Chapter 13 bankruptcy would potentially eliminate some of the credit card debt; however, it is more likely some sort of repayment plan will be worked out. The alimony John pays to his former spouse would not be discharged and student loans are extremely difficult to get discharged. John and Mary would also be required to submit to credit counseling before filing for Chapter 13.
„ The outstanding 401(k) loan will remain. It is a loan Mary owes to herself since it is from her retirement account. State law typically exempts balances held in ERISA-covered retirement plans, such as 401(k) plans, from the claims of creditors.
„ There are court costs and fees associated with bankruptcy, as well as other adverse effects that may impact other family members and businesses.
_Rather than filing for bankruptcy, their advisor recommended that John and Mary cut their monthly expenses and come up with a repayment plan for their debts. They have adequate income to avoid bankruptcy, and bankruptcy would not enable them to discharge their large debts and have a fresh start as they thought. Avoiding bankruptcy would enable them to start improving their credit rating over time as they get their spending under control and finances in order.

Question 20

Consumer Credit Protection Act (Truth in Lending Act)

Answer 20

• makes lenders have certain uniform disclosures
• one provision was establishment of standard method of calculating & reporting interest (APR)
• many contracts require borrower to be given 3 days to rescind the contract
• Regulation Z requires several disclosures
• protections for consumers from unauthorized credit card use. Card holder liable for only $50 of unauthorized charges if they report to issuer that card was lost or stolen

Question 21

Regulation Z requires following disclosures:

Answer 21

• APR
• when payments begin
• charges for late payments
• prepayment info
• amount financed
• right of rescission

Question 22

Fair Credit Reporting Act (FCRA)

Answer 22

• consumers denied credit must be notified about credit reporting agency provided info to potential credit. Then consumer has period of 30 days to request free copy of credit file.
• when adverse info is entered into an individuals credit file, may be maintained for 7 years, and bankruptcy info may be retained for up to 10 years
• If any info contained in report is in error, must be corrected and consumer can request corrected report be sent to creditors who received erroneous report in past 6 months, and employers who received report in past 2 years (if reporting agency & consumer do not agree on what info is correct, consumer has right to include written version of facts in file, which must be included to prospective creditors requesting report)

Question 23

Fair Credit Billing Act

Answer 23

requires consumers to notify creditor in writing of any billing errors w/ in 60 days of date they receive statement. Creditors then have 30 days to respond back and 90 days to resolve complaint

Question 24

Equal Credit Opportunity Act

Answer 24

• prohibits credit discrimination on basis of:
• race, color, gender, etc.
• fact that all or part of applicant’s income derives from public assistance program
• fact that applicant has in good faith exercised any right under Consumer Credit Protection Act

Question 25

Electronic Fund Transfer Act

Answer 25

provides for recovery by those who suffer losses due to financial institution failing to follow provisions of the act

Question 26

Consumer Credit Reporting Reform Act

Answer 26

• requires credit bureau reports to include accurate, relevant, and recent info about financial situation of credit applicants. The act also restricts access to credit files only to bona fide users of financial information. Finally, under the act, applicants who are denied credit must be advised why and must be given the name and address of the reporting credit agency.

Question 27

Fair Debt Collection Practices Act

Answer 27

prohibits debt collectors from engaging in certain practices, such as contacting a debtor at his place of employment if the employer objects, harassing or intimidating the debtor, or using false and misleading practices. A state court may issue an order for garnishment of a portion of a debtor’s wages in order to satisfy a legal judgment that was obtained by a creditor.

Question 28

Fair Debt Collection Practices Act

Answer 28

prohibits debt collectors from engaging in certain practices, such as contacting a debtor at his place of employment if the employer objects, harassing or intimidating the debtor, or using false and misleading practices. A state court may issue an order for garnishment of a portion of a debtor’s wages in order to satisfy a legal judgment that was obtained by a creditor.

Question 29

Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act)

Answer 29

Was enacted to establish fair practices and to enable consumers to better understand their credit transactions.

Question 30

Privacy Act of 1974

Answer 30

Established a code of fair information practices that regulates the types of personal information the federal government can collect and how this information can be used. Written consent from an individual must be given before personal information may be disclosed unless the disclosure falls under 1 of 12 statutory exceptions.

Question 31

Fair and Accurate Credit Transaction Act of 2003 (FACTA)

Answer 31

added new sections to the federal FCRA that gives consumers greater protection against the growing crime of identity theft. Under FACTA, consumers can obtain a free credit report every 12 months from each of the three national credit reporting agencies—Equifax, TransUnion, and Experian. FACTA also requires that consumer information be disposed of in a secure manner. Under the act, individuals can place alerts on their credit histories if identity theft is suspected or if deploying overseas in the military. The act also requires the secure disposal of consumer information.