Module 6

Question 1

Economics is the study of:

Answer 1

Production, distribution, and consumption, or the study of choices in the presence of scarce resources, divided into two broad areas: microeconomics and macroeconomics.

Question 2

Microeconomics

Answer 2

The study of how individuals and companies make decisions to allocate scarce resources, which helps in understanding how individuals and companies prioritize their wants.

Question 3

Macroeconomics

Answer 3

The study of an economy as a whole. For example, macroeconomics examines factors that affect a country’s economic growth.

Question 4

Much of economic theory is based on the relationship between:

Answer 4

Supply and demand.

Question 5

Equilibrium

Answer 5

The price of a good or service and how much will be produced is indicated at the intersection of the supply and demand curves.

Question 6

Many economic problems assume that either:

Answer 6

Demand or supply is the (independent) variable changed and that both price and quantity are the (dependent) variables that must be determined.

Question 7

In economic analysis, and for answering questions on the CFP® exam, remember:

Answer 7

Only one variable is changed at a time. All other variables are assumed to be held constant. This is obviously not the case in the real world, where multiple variables undergo constant change. For answering questions, determine the one main variable that is changing and focus on the specific question.

Question 8

Price Elasticity

Answer 8

The responsiveness of the quantity of a good demanded to changes in price, all other economic forces remaining constant. Goods differ in their elasticity in relation to price.

Question 9

Inelastic Goods

Answer 9

Demand for necessities, such as food or gasoline, responds relatively little to price changes; therefore, those types of goods are said to be inelastic.

Question 10

Elastic Goods

Answer 10

The demand for luxuries, such as a new motorboat, responds relatively more to price changes; therefore, those types of goods are said to be elastic or demonstrate a great deal of price elasticity.

Question 11

What you are trying to do with elasticity is:

Answer 11

Determine how many units of quantity are changed for every unit of price change.

Question 12

Gross Domestic Product (GDP)

Answer 12

The total monetary value of all goods and services produced within the domestic United States over the course of a given year, including income generated domestically by a foreign firm (e.g., Toyota Motor Corp.).

Question 13

GDP is measured in:

Answer 13

Constant, non-inflation adjusted dollars, which translates into a real GDP after accounting for inflation (subsequent to a predetermined base or index year). Real GDP allows statisticians, economists, and investors to determine true production year-to-year.

Question 14

The formula that describes the components of GDP is:

Answer 14

GDP = C + I + G + NE

where:
C = consumption (generally spending by individuals on durable and nondurable goods and services)
I = investment (generally business spending on inventory, plants, and equipment, but including new housing purchases by consumers)
G = government spending, including federal, state, and local
NE = net exports (total exports less total imports)

Question 15

Gross National Product (GNP)

Answer 15

When Toyota builds and runs an auto assembly plant in the United States, it will show up in U.S. GDP even though it is a foreign company. However, when General Motors builds an auto assembly plant in China, it does not show up in our GDP (it would be reflected in China’s GDP). This is because it is not creating jobs and activity here in the United States. The plant in China will show up in gross national product (GNP).

Question 16

GNP measures:

Answer 16

Activity by ownership and takes into account any production by a company both in-and outside the home country.

Question 17

The federal government is responsible for which policy?

Answer 17

Fiscal policy.

Question 18

The federal reserve board is responsible for which policy?

Answer 18

Monetary policy.

Question 19

Fiscal Policy

Answer 19

The use of a government’s spending and taxation to influence the economy. Governments use fiscal policy to promote economic growth, reduce poverty, and maintain a balance of payments and receipts.

Question 20

Who are the responsible parties for fiscal policy?

Answer 20

Congress and the president.

Question 21

How do fiscal policies get passed?

Answer 21

Congress passes legislation and the president signs into law.

Question 22

How do fiscal policies operate to implement economic changes?

Answer 22

Make changes to tax laws, as well as increases and decreases government spending.

Question 23

Who is the responsible party for monetary policies?

Answer 23

Federal Reserve Board (Fed)

Question 24

How do monetary policies get passed?

Answer 24

The Fed independently makes and implements decisions.

Question 25

How do monetary policies operate to implement economic changes?

Answer 25

Changes in reserves required for banks, changes in the discount rate that banks pay for short-term loans from the Fed, and conducts open-market operations.

Question 26

Two tools are used in exercising fiscal policy:

Answer 26

„ The power to tax
„ The power to spend

Question 27

The Fed uses three major tools to enact monetary policy. They are:

Answer 27

„ reserve requirements;
„ discount rate; and
„ open-market operations.

Question 28

In recent years, Congress has conducted a policy of deficit spending, meaning:

Answer 28

Government expenditures exceed revenues, which, in turn, causes the government to sell securities to the public to finance these deficits. This results in a crowding out effect with respect to other potential borrowers. As a result, market interest rates must eventually rise to compete for the limited overall money supply that is made available by the Fed.

Question 29

Fiscal policy can be either:

Answer 29

Expansionary or contractionary.

Question 30

Expansionary Policy

Answer 30

An expansionary fiscal policy often involves increasing government spending or by reducing taxes for individuals and/or businesses.

Question 31

Contractionary Policy

Answer 31

A contractionary fiscal policy commonly incorporates decreases to government spending and/or increases to individual and/or business taxes.

Question 32

Among the three monetary policy tools, the most important and most frequently practiced is:

Answer 32

Open-market operations carried out by the Fed.

Question 33

If the Fed wants to expand economic activity, it will:

Answer 33

Buy government securities in exchange for money, thereby increasing the money supply and driving down overall interest rates.

Question 34

If the Fed wants to contract economic activity, it will:

Answer 34

Sell government securities from its existing inventory, thereby decreasing the money supply, driving up overall interest rates, and reducing prices.

Question 35

Interest rates can be classified in a few different ways; however, the Fed only directly controls one interest rate—the:

Answer 35

discount rate (the rate at which banks can borrow from any of the Federal Reserve Banks).

Question 36

When the Fed raises the discount rate, it increases the:

Answer 36

Cost of borrowing and discourages member banks from borrowing funds, resulting in a contraction of the money supply.

Question 37

The Fed will lower the discount rate when it wants to:

Answer 37

Increase the money supply.

Question 38

The Fed greatly influences (or indirectly controls) two other interest rates—the:

Answer 38

Federal funds rate and the prime rate.

Question 39

The Federal Funds Rate

Answer 39

The interest rate charged on short-term borrowing (often overnight to fulfill reserve requirements) between banks; the Fed targets, but does not directly control, this rate in all of its interest rate decisions.

Question 40

The Prime Rate

Answer 40

The rate of interest charged by commercial banks to their best business and personal customers. This rate is set directly by commercial banks; however, it normally is about 3% higher than the federal funds rate.

Question 41

In order to determine if the Fed’s open-market operations are expansionary or contractionary, just:

Answer 41

Follow the money. If the Fed is buying government securities, then they would be holding the government paper and the public would be receiving the cash, which is expansionary. If the Fed is selling securities, then the public would be holding the government paper and the Fed would have the cash, which is contractionary.

Question 42

The Business Cycle

Answer 42

Reflects movements in economic activity and illustrates the concepts of supply and demand.

Question 43

Low inflation (falling Consumer Price Index [CPI]) is a characteristic of:

Answer 43

The expansionary phase.

Question 44

as the economy starts to heat up (increasing demand), inflation (rising Consumer Price Index) may rise on the way to the peak. As a result, the Fed may choose to:

Answer 44

Raise interest rates to curb inflation.

Question 45

Does INCOME decrease/increase during expansion? What about contraction?

Answer 45

Expansion: Increase
Contraction: Decrease

Question 46

Does DEMAND decrease/increase during expansion? What about contraction?

Answer 46

Expansion: Increase
Contraction: Decrease

Question 47

Does SENTIMENT decrease/increase during expansion? What about contraction?

Answer 47

Expansion: Increase
Contraction: Decrease

Question 48

Does CONSUMER CREDIT decrease/increase during expansion? What about contraction?

Answer 48

Expansion: Increase
Contraction: Decrease

Question 49

Do RETAIL SALES decrease/increase during expansion? What about contraction?

Answer 49

Expansion: Increase
Contraction: Decrease

Question 50

Do AUTO SALES decrease/increase during expansion? What about contraction?

Answer 50

Expansion: Increase
Contraction: Decrease

Question 51

Does MORTGAGE DEBT decrease/increase during expansion? What about contraction?

Answer 51

Expansion: Increase
Contraction: Decrease

Question 52

Do HOUSING STARTS decrease/increase during expansion? What about contraction?

Answer 52

Expansion: Increase
Contraction: Decrease

Question 53

Does INFLATION decrease/increase during expansion? What about contraction?

Answer 53

Expansion: Decrease
Contraction: Increase

Question 54

Does UNEMPLOYMENT decrease/increase during expansion? What about contraction?

Answer 54

Expansion: Decrease
Contraction: Increase

Question 55

Does CONSUMER PRICE INDEX (CPI) decrease/increase during expansion? What about contraction?

Answer 55

Expansion: Decrease
Contraction: Increase

Question 56

Does GROSS DOMESTIC PRODUCT (GDP) decrease/increase during economic peaks? What about troughs?

Answer 56

Peak: Increase
Trough: Decrease

Question 57

Does PRODUCER PRICE INDEX (PPI) decrease/increase during economic peaks? What about troughs?

Answer 57

Peak: Increase
Trough: Decrease

Question 58

Does INFLATION decrease/increase during economic peaks? What about troughs?

Answer 58

Peak: Increase
Trough: Decrease

Question 59

Does OUTPUT decrease/increase during economic peaks? What about troughs?

Answer 59

Peak: Increase
Trough: Decrease

Question 60

Does INDUSTRIAL PRODUCTION decrease/increase during economic peaks? What about troughs?

Answer 60

Peak: Increase
Trough: Decrease

Question 61

Does CAPACITY UTILIZATION decrease/increase during economic peaks? What about troughs?

Answer 61

Peak: Increase
Trough: Decrease

Question 62

Does LABOR PRODUCTIVITY decrease/increase during economic peaks? What about troughs?

Answer 62

Peak: Decrease
Trough: Increase

Question 63

Does EFFICIENCY decrease/increase during economic peaks? What about troughs?

Answer 63

Peak: Decrease
Trough: Increase

Question 64

A recession occurs when:

Answer 64

The GDP has experienced a decrease in real terms for two consecutive quarters or a minimum of six months from a baseline of zero. Recessions are characterized by several features, including high unemployment, reduction in manufacturing, increases in inventory of durable goods, a decline in GDP, contractions in corporate profits, and lower consumer spending.

Question 65

A depression occurs when:

Answer 65

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

Question 66

For purposes of determining which phase of the business cycle the economy is currently or likely to be in the future, there are three types of economic indicators:

Answer 66

„ Leading indicators
„ Coincident indicators
„ Lagging or confirming indicators

Question 67

Leading Indicators

Answer 67

are those that tend to precede actual economic change. Examples of leading indicators are:

• stocks
  – housing starts,
  – new claims for unemployment,
  – bond yields (spread between 10-year Treasury bonds and federal funds),
  – indexes of stock prices,
  – orders for durable goods, and
  – changes in investor sentiment.

Question 68

Remember that stocks are a leading indicator, which means:

Answer 68

That staying out of the market and waiting for things to get better before getting back into the market will not work. Once things look better, the market will have already moved higher. The CFP Board looks for stocks to be long-term investments (commitment of 5 to 10 years or longer) and not to be actively traded based on economic indicators, especially leading indicators.

Question 69

Coincident Indicators

Answer 69

Those that occur simultaneously during the business cycle and confirm the stage that the economy is currently experiencing. Examples of coincident indicators are

– industrial production,
– level of personal income, and
– amount of corporate profits.

Question 70

Lagging or Confirming Indicators

Answer 70

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

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

Question 71

Inflation

Answer 71

Defined as a rise in the average level of prices of goods and services.

Question 72

The two most common measures of inflation are:

Answer 72

the Consumer Price Index (CPI) and the Producer Price Index (PPI).

Question 73

The Consumer Price Index (CPI) program produces:

Answer 73

Monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services.

Question 74

The Producer Price Index (PPI) program measures:

Answer 74

The average change over time in the selling prices received by domestic producers for their output.

Question 75

Inflation erodes or reduces the:

Answer 75

Purchasing power of money.

Question 76

Deflation

Answer 76

A sustained decrease in the general price level of goods and services, and is the opposite of inflation. It can be caused by a number of factors, including:

• A decrease in the money supply
• An increase in productivity
• A decrease in demand
• An abundance of goods and services

Question 77

Disinflation

Answer 77

A reduction in the rate of inflation.

Question 78

Which of the following practices would the Fed conduct if it wanted to contract the overall economy?

A. Decrease the federal government’s budget
B. Increase the prime rate
C. Decrease reserve requirements for member banks
D. Increase the target federal funds rate

Answer 78

D. Increase the target federal funds rate

Question 79

Chapter 7 Bankruptcy

Answer 79

Chapter 7 bankruptcy, often referred to as “liquidation” bankruptcy, is a legal process designed to help individuals and businesses eliminate most of their unsecured debts, such as credit card bills, medical expenses, and personal loans. It is one of the most common forms of bankruptcy in the United States.

Question 80

Advantages of Chapter 7 Bankruptcy:

Answer 80

• Fast Relief: You can get a discharge of most debts relatively quickly (usually within a few months).
• Fresh Start: It offers a chance to eliminate overwhelming debt and start fresh.
• No Repayment Plan: Unlike Chapter 13, you don’t have to commit to a repayment plan.

Question 81

Disadvantages of Chapter 7 Bankruptcy:

Answer 81

• Asset Liquidation: You may have to give up some of your property to satisfy creditors, although exemptions may protect some of your assets.
• Impact on Credit: As mentioned, it can severely damage your credit score for years.
• Not All Debts Are Discharged: Some debts, like student loans or tax debts, may not be dischargeable under Chapter 7.

Question 82

Chapter 13 Bankruptcy

Answer 82

Chapter 13 bankruptcy is a form of bankruptcy that allows individuals to reorganize their debts and create a repayment plan, rather than having those debts discharged outright as in Chapter 7 bankruptcy. It is often referred to as a “wage earner’s plan” because it is primarily designed for individuals with a regular income who have the ability to repay some or all of their debts over time.

Question 83

Advantages of Chapter 13 Bankruptcy:

Answer 83

• Asset Protection: You can keep your property, including your home and car, even if you are behind on payments. It helps you avoid foreclosure or repossession.
• Lower Payments: Chapter 13 may reduce monthly payments, especially on unsecured debts, and offers the possibility of extending payment terms.
• Debt Consolidation: The debtor makes a single monthly payment to a bankruptcy trustee, who then distributes the funds to creditors. This can simplify finances and reduce the stress of dealing with multiple creditors.
• Discharge of Remaining Unsecured Debts: At the end of the repayment period, any remaining unsecured debts (like credit card debt) may be discharged, giving the debtor a fresh financial start.

Question 84

Disadvantages of Chapter 13 Bankruptcy:

Answer 84

• Long-Term Commitment: Chapter 13 requires a long-term commitment of 3 to 5 years, which means the debtor must adhere to the payment plan for that entire period. This can be financially and emotionally challenging.
• Higher Repayment: Unlike Chapter 7, Chapter 13 doesn’t wipe out your debts right away; you still need to pay a portion of your debts through the repayment plan.
• Credit Impact: While Chapter 13 is less damaging to your credit than Chapter 7, it still affects your credit score and remains on your credit report for 7 years after the case is filed.
• Eligibility Limitations: If your debts exceed the limit set for Chapter 13, you may not qualify for this type of bankruptcy and would need to consider alternatives.

Question 85

Common Situations for Chapter 13:

Answer 85

• You want to keep your home and prevent foreclosure but are behind on mortgage payments.
• You have significant secured debts (like car loans or mortgages) that you need to catch up on, but you don’t want to lose the property securing those loans.
• You have too much income or too many assets to qualify for Chapter 7 but still need debt relief.
• You are dealing with tax debt and want to repay it through an affordable plan while avoiding liens or garnishments.

Question 86

The Bankruptcy Act of 2005

Answer 86

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) is a significant piece of legislation that made major reforms to the U.S. bankruptcy system, particularly Chapter 7 and Chapter 13 filings. The law was enacted in response to concerns that many individuals were abusing the bankruptcy process, especially by using Chapter 7 bankruptcy (which allows for the discharge of most debts) without attempting to repay creditors under Chapter 13 (which involves a repayment plan).

The Bankruptcy Act of 2005 aimed to make it more difficult for people to file for Chapter 7 bankruptcy, promote repayment to creditors where possible, and improve the overall efficiency of the bankruptcy process.

Question 87

Summary of Key Changes Under the BAPCPA:

Answer 87

• Means test to qualify for Chapter 7, leading more people to Chapter 13.
• Credit counseling and financial education requirements.
• Stricter rules on dischargeability of debts, especially for student loans, luxury purchases, and cash advances.
• Increased filing fees and more documentation required.
• Stricter eligibility and requirements for property exemptions.
• Enhanced oversight of bankruptcy filings to prevent abuse.

Question 88

Debts and obligations that are not generally dischargeable:

Answer 88

„ student and government loans,
„ child support and alimony obligations, and
„ recent federal income taxes due.

Question 89

Chapter 11 Bankruptcy

Answer 89

Chapter 11 bankruptcy is a type of bankruptcy designed for businesses, though it can also be used by individuals with complex financial situations and substantial assets. Unlike Chapter 7 or Chapter 13, which focus on liquidating assets or repaying creditors, Chapter 11 allows for reorganization of the debtor’s financial affairs, with the goal of continuing operations while restructuring debts. It provides businesses with a way to stay afloat while they attempt to return to profitability, often by renegotiating contracts, reducing debt, and finding ways to improve cash flow.

Question 90

Pros of Chapter 11 Bankruptcy:

Answer 90

• Business Continuity: The primary benefit of Chapter 11 is that it allows businesses to continue operating, preserving jobs and the value of the business. The goal is to reorganize rather than liquidate.
• Debt Restructuring: It provides an opportunity to restructure burdensome debt and renegotiate contracts with creditors, suppliers, and landlords.
• Flexibility: Chapter 11 allows a business to address its problems in a way that Chapter 7 does not. It can choose to reject unprofitable contracts or renegotiate terms with creditors.
• Fresh Start: Once the reorganization plan is approved and debts are restructured, the business can emerge with a much cleaner balance sheet, making it easier to attract investors, secure financing, and operate profitably.

Question 91

Cons of Chapter 11 Bankruptcy:

Answer 91

• Costly: Chapter 11 bankruptcy is expensive due to court fees, attorney fees, and the cost of hiring financial advisors, accountants, and other professionals. It can also take several years to complete the reorganization process.
• Complexity: The process involves significant paperwork, negotiations with creditors, and legal requirements. It can be very complex, especially for smaller businesses without the resources to manage the filing process.
• Uncertainty: There is no guarantee that the reorganization will be successful. The business may still be forced to close or sell its assets if the court does not approve the reorganization plan or if creditors reject it.

Question 92

Common Situations for Chapter 11:

Answer 92

• Large Corporations: Many large companies, including airlines, car manufacturers, and retail giants, have used Chapter 11 bankruptcy to reorganize, restructure debt, and continue operations.
• Small Businesses: Small businesses may also use Chapter 11, although they are more likely to file under a simpler form of reorganization called Subchapter V (which is part of the 2019 Small Business Reorganization Act). Subchapter V streamlines the process for small businesses, making it less expensive and more accessible.
• Troubled Industries: Chapter 11 is often used by companies in industries facing long-term decline, such as the retail, energy, or hospitality industries.

Question 93

The Consumer Credit Protection Act

Answer 93

The Consumer Credit Protection Act (CCPA) is a significant piece of U.S. federal legislation enacted in 1968 with the aim of protecting consumers from unfair lending practices and promoting transparency in the credit industry. The Act lays the foundation for much of the modern consumer protection law related to credit, lending, and debt collection practices. It is composed of several key provisions that regulate the way credit is extended, the way lenders communicate with borrowers, and how consumers’ credit rights are safeguarded.

Question 94

Key Provisions of the Consumer Credit Protection Act:

Answer 94

1. Truth in Lending Act (TILA)
2. Fair Debt Collection Practices Act (FDCPA)
3. Fair Credit Reporting Act (FCRA)
4. Equal Credit Opportunity Act (ECOA)
5. Consumer Credit Protection Act and Wage Garnishment

Question 95

Key Benefits of the Consumer Credit Protection Act:

Answer 95

• Transparency: The Act ensures that consumers are fully informed about the terms and costs of credit before they enter into agreements, making it easier to compare credit options and avoid predatory lending practices.
• Protection from Abusive Debt Collection: The FDCPA provides strong protections against harassment and unfair tactics by debt collectors, helping to ensure that consumers are treated fairly.
• Credit Reporting Accuracy: The FCRA helps ensure that consumers’ credit reports are accurate, giving individuals the ability to correct errors that could harm their financial standing.
• Fair Lending Practices: The Equal Credit Opportunity Act promotes fairness by making it illegal for lenders to discriminate against borrowers on the basis of non-financial factors.
• Wage Protection: The Act provides protections against excessive wage garnishment, ensuring that consumers can maintain a basic standard of living even when facing financial difficulties.

Question 96

Regulation Z

Answer 96

Regulation Z is a key regulation under the Consumer Credit Protection Act (CCPA) that implements the Truth in Lending Act (TILA). It is issued by the Federal Reserve (now managed by the Consumer Financial Protection Bureau (CFPB)) and governs the disclosure of credit terms to consumers. The purpose of Regulation Z is to promote transparency and ensure that consumers are well-informed about the costs and terms of credit before they agree to borrow money. It helps protect consumers from predatory lending practices and provides them with the information they need to make informed financial decisions.

Question 97

Regulation Z requires several disclosures:

Answer 97

„ APR
„ When payments begin
„ Charges for late payments
„ Prepayment information
„ Amount financed
„ Right of rescission

Question 98

Fair Credit Reporting Act (FCRA)

Answer 98

The Fair Credit Reporting Act (FCRA) is a U.S. federal law enacted in 1970 that regulates the collection, dissemination, and use of consumer credit information. The main purpose of the FCRA is to ensure that consumer credit reports are accurate, fair, and used only for legitimate purposes. It also aims to protect consumers’ privacy by limiting access to their credit information and providing them with rights to dispute inaccuracies.

Question 99

Fair Credit Billing Act

Answer 99

Requires consumers to notify the creditor in writing of any billing errors within 60 days of the date they receive the billing statement. Creditors then have 30 days to respond to the consumer with respect to the possible billing error and 90 days to resolve the complaint.

Question 100

Equal Credit Opportunity Act

Answer 100

Prohibits credit discrimination on the basis of:

– race, color, religion, national origin, gender, marital status, age, or sexual orientation (provided the applicant has the capacity to contract);
– the fact that all or part of the applicant’s income derives from a public assistance program; or
– the fact that the applicant has in good faith exercised any right under the Consumer Credit Protection Act.

Question 101

Electronic Fund Transfer Act

Answer 101

The Electronic Fund Transfer Act (EFTA) is a U.S. federal law enacted in 1978 to regulate electronic payments and transfers of funds. The purpose of the EFTA is to protect consumers who engage in electronic banking and payment systems, such as debit card transactions, ATMs, wire transfers, and direct deposits. The law establishes the basic rights, responsibilities, and liabilities for consumers and financial institutions involved in electronic fund transfers (EFTs).

Question 102

Consumer Credit Reporting Reform Act

Answer 102

Requires credit bureau reports to include accurate, relevant, and recent information about the 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 103

Fair Debt Collection Practices Act

Answer 103

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 104

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

Answer 104

A U.S. federal law aimed at protecting consumers from unfair and deceptive practices by credit card issuers and lenders. It was signed into law on May 22, 2009, in response to concerns about abusive credit card practices, including high fees, sudden interest rate hikes, and complex terms that consumers could not easily understand.

The CARD Act enhances transparency, limits fees, and establishes stronger consumer protections to ensure that credit card issuers treat consumers fairly. It also grants consumers more control over their credit card accounts, helps them make better financial decisions, and curbs some of the practices that led to financial distress for many cardholders.

Question 105

Servicemembers Civil Relief Act (SCRA)

Answer 105

A U.S. federal law designed to protect military service members from certain legal and financial challenges that might arise during their service. Originally enacted as the Soldiers’ and Sailors’ Civil Relief Act of 1940, it was updated and expanded in 2003 under its current name. The SCRA provides various legal protections to ensure that service members are not unfairly penalized or disadvantaged due to their military service, particularly during periods of deployment or other active duty assignments.

Question 106

Liam recently applied for a home mortgage loan from ABC Bank that was declined. Liam does not understand why his loan application was rejected because he is currently employed. What recourse does he have in this situation?

Answer 106

Liam has protections under the FCRA and should contact his bank to find out which credit-reporting bureau provided the information. The three major credit rating bureaus are Equifax, Experian, and TransUnion. Liam has up to 30 days to request a free copy of his credit file information. He will also find out his FICO score (which can range from 300 to 850). If there is an error in his credit report, it must be investigated and corrected and a new report must then be sent to his bank from the credit bureau.

Question 107

Privacy Act of 1974

Answer 107

A U.S. federal law designed to protect the personal information of individuals maintained by federal agencies. The law governs how federal agencies collect, store, use, and disclose personal information, ensuring that individuals have certain rights regarding their personal data held by the government.

The Privacy Act was enacted to address concerns about the growing collection of personal data by the federal government and the potential for misuse of that information. It creates safeguards to protect the privacy of U.S. citizens and lawful permanent residents, offering transparency, access, and control over personal information held by government agencies.

Question 108

Fair and Accurate Credit Transaction Act of 2003 (FACTA)

Answer 108

A significant amendment to the Fair Credit Reporting Act (FCRA), which was enacted to enhance consumer protections and improve the accuracy of information in credit reports. FACTA was signed into law on December 4, 2003, and it addresses several critical issues related to consumer credit, identity theft, and the accuracy of credit reporting. The law is designed to increase transparency and protect consumers from fraud and unauthorized use of personal information.

Question 109

Phishing

Answer 109

A type of cyber attack in which fraudsters attempt to deceive individuals into divulging sensitive personal information—such as passwords, credit card numbers, Social Security numbers, or other confidential data—by pretending to be a trustworthy entity or service. Phishing attacks are usually carried out via email, text messages, phone calls, or other forms of communication.

Question 110

Skimming

Answer 110

A type of fraudulent activity in which criminals use a small, discreet device known as a skimmer to illegally collect information from the magnetic stripe or chip on a credit card, debit card, or other payment card. This data is then used to make unauthorized transactions or steal the victim’s identity. Skimming can happen at ATMs, point-of-sale (POS) terminals, gas stations, and other places where people use their cards for transactions.

Question 111

Movement through the phases of the business cycle is initiated by shifts in aggregate demand that create fluctuations in gross domestic product (GDP). Which combination of the following statements would be the most significant contributor to the upward shift in aggregate demand?

I. Increase in demand for capital goods
II. Increase in interest rates
III. Increase in disposable income
IV. Increase in savings

A. I and III
B. I, II, and III
C. I, III, and IV
D. II and IV
E. III and IV

Answer 111

A. I and III

Shifts in aggregate demand are generated by increases in the demand for capital goods and the increase in a consumer’s disposable income. Increases in interest rates and savings negatively affect aggregate demand.

Question 112

Identify the inelastic good(s).

I. Stereo equipment
II. Prescription medication
III. Fine art
IV. Electricity

A. I only
B. I and II
C. I and III
D. II and IV

Answer 112

D. II and IV

Prescription medication and electricity would be most likely considered necessities and would demonstrate price inelasticity. The others are not necessities and represent demand that is heavily influenced by the item’s price (elasticity).

Question 113

The economy is approaching full employment and inflation is rising rapidly. What would be the prudent fiscal policy to enact under this scenario?

A. Raise taxes and raise the discount rate.
B. Raise taxes and decrease government spending.
C. Lower taxes and increase government spending.
D. Lower taxes and lower the discount rate.

Answer 113

B. Raise taxes and decrease government spending.

Under this scenario, the economy is overheating and should be slowed down. Possible fiscal actions include raising taxes, decreasing government spending, or increasing government borrowing (which then increases interest rates). Lowering or raising the discount rate is a monetary (not fiscal) tool available to the Federal Reserve.

Question 114

The federal funds rate will tend to move upward under which of the following conditions?

(Note: This is a previously released CFP® Certification Exam question.)

A. The Federal Reserve is buying government securities.
B. The Federal Reserve lowers the discount rate.
C. A few banks have excess reserve deficiencies, and the rest have ample excess reserves.
D. A few banks have excess reserves, and the rest have significant reserve deficiencies.

Answer 114

D. A few banks have excess reserves, and the rest have significant reserve deficiencies.

If most banks have reserve deficiencies (that is, they need money) and only a few banks have excess reserves (that is, they have an ample supply of money), supply and demand factors will cause the federal funds rate to rise. This is because, from the standpoint of the overall economy, there is a low supply of money and a large demand for money, meaning that interest rates will rise.

Question 115

Select the strategy the Fed would implement if it wanted to contract the overall economy.

A. Buy U.S. government securities in the open market.
B. Lower the discount rate.
C. Target the federal funds rate in a lower range than previously.
D. Increase the reserve requirements for member banks.

Answer 115

D. Increase the reserve requirements for member banks.

If the reserve requirement is increased for member banks, less money will be available for loans to existing or potential customers, thereby restricting the overall money supply.

Question 116

The economy is experiencing an increase in housing starts and a decline in the unemployment rate. Based on this economic activity, identify the phase of the business cycle.

A. Peak
B. Trough
C. Expansion
D. Contraction

Answer 116

C. Expansion

An increase in housing starts and a decline in the unemployment rate are reflections of an economy that is expanding. If a peak had been reached, housing start numbers would be at a relative high and would then start to decline.

Question 117

Identify the economic indicators that can best be described as preceding or leading to a change in the business cycle.

A. Unemployment rate and bond yields
B. Prime rate of interest and industrial production
C. Amount of corporate profits and level of personal income
D. Level of housing starts and orders for durable goods

Answer 117

D. Level of housing starts and orders for durable goods

The level of housing starts precedes economic change and may, thus, be termed as a leading economic indicator. Durable goods are long-lasting, characterized by a usable life span over three years. Examples include automobiles, computers, household goods, and medical equipment. When an order for durable goods is placed with a manufacturer, production to fill the order is initiated in the future which creates employment opportunities across a variety of related industries. Because new orders for durable goods preempt future economic production, they are considered a leading indicator. All of the other choices are incorrect because they represent coincident or lagging indicators or are paired with one.

Question 118

Match the description with the appropriate term:

Deflation
Stagflation
Inflation
Disinflation

A. An increase in the general level of prices.
B. A decline in the general price level and is often caused by a reduction in the money supply and consumer demand.
C. Characterized by high inflation and increasing unemployment. The general growth of the economy slows as business output falls.
D. A decline in the rate of inflation.

Answer 118

Deflation - B
Stagflation - C
Inflation - A
Disinflation - D

Question 119

Select the item that is NOT generally dischargeable by a debtor in a bankruptcy filing.

A. Veterans’ benefits
B. Past-due alimony obligations
C. Equity in a personal residence
D. A specified amount in a personal automobile

Answer 119

B. Past-due alimony obligations

Read the question carefully: it is asking about the obligations of the debtor and which of these is not dischargeable, not which assets are protected. Past-due alimony obligations are not generally dischargeable in bankruptcy. The remaining items are either state or federally exempt assets.

Question 120

All of the following are identity theft protection measures except:

A. refusing to provide your Social Security number to internet solicitors.
B. contacting the SEC as soon as possible after learning of the theft.
C. regularly inspecting credit reports and reviewing billing statements.
D. closing any accounts you believe may have been established in error.

Answer 120

B. contacting the SEC as soon as possible after learning of the theft.

Any suspicion of identity theft should be reported immediately to the Federal Trade Commission (FTC), not the Securities and Exchange Commission (SEC).

Question 121

Which of these demonstrates fair information practices regulating the use of personal information?

I. Written consent from an individual must be given before personal information may be disclosed, unless the disclosure falls under an exception.
II. Credit reporting agencies must follow reasonable procedures to protect the confidentiality and accuracy of an individual’s credit information.

A. I only
B. II only
C. Both I and II
D. Neither I nor II

Answer 121

C. Both I and II

Question 122

Match each description with the correct fair credit reporting law. Use each letter once:

Fair Credit Billing Act
Consumer Credit Reporting Reform Act
Fair Credit Debt Collection Practices Act
Equal Credit Opportunity Act

A. Requires credit bureau reports to include accurate, relevant, and recent information about the financial situation of credit applicants.
B. Prohibits credit discrimination on the basis of race, color, religion, national origin, gender, marital status, age, or sexual orientation.
C. Requires consumers to notify the creditor in writing of any billing errors within 60 days of the date they receive the billing statement.
D. 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.

Answer 122

Fair Credit Billing Act - C
Consumer Credit Reporting Reform Act - A
Fair Credit Debt Collection Practices Act - D
Equal Credit Opportunity Act - B