Module 6 Flashcards by Lizzy Fuentes

Q

Economics is the study of:

A

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

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Q

Microeconomics

A

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

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Q

Macroeconomics

A

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

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Q

Much of economic theory is based on the relationship between:

A

Supply and demand.

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Q

Equilibrium

A

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

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Q

Many economic problems assume that either:

A

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

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Q

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

A

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.

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Q

Price Elasticity

A

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.

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Q

Inelastic Goods

A

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

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Q

Elastic Goods

A

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.

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Q

What you are trying to do with elasticity is:

A

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

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Q

Gross Domestic Product (GDP)

A

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.).

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Q

GDP is measured in:

A

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.

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Q

The formula that describes the components of GDP is:

A

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)

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Q

Gross National Product (GNP)

A

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).

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Q

GNP measures:

A

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

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Q

The federal government is responsible for which policy?

A

Fiscal policy.

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Q

The federal reserve board is responsible for which policy?

A

Monetary policy.

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Q

Fiscal Policy

A

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.

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Q

Who are the responsible parties for fiscal policy?

A

Congress and the president.

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Q

How do fiscal policies get passed?

A

Congress passes legislation and the president signs into law.

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Q

How do fiscal policies operate to implement economic changes?

A

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

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Q

Who is the responsible party for monetary policies?

A

Federal Reserve Board (Fed)

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Q

How do monetary policies get passed?

A

The Fed independently makes and implements decisions.

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How do monetary policies operate to implement economic changes?

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.

Two tools are used in exercising fiscal policy:

The power to tax The power to spend

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

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

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

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.

Fiscal policy can be either:

Expansionary or contractionary.

Expansionary Policy

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

Contractionary Policy

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

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

Open-market operations carried out by the Fed.

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

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

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

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

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

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

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

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

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

Increase the money supply.

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

Federal funds rate and the prime rate.

The Federal Funds Rate

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.

The Prime Rate

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.

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

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.

The Business Cycle

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

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

The expansionary phase.

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:

Raise interest rates to curb inflation.

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

Expansion: Increase Contraction: Decrease

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

Expansion: Increase Contraction: Decrease

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

Expansion: Increase Contraction: Decrease

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

Expansion: Increase Contraction: Decrease

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

Expansion: Increase Contraction: Decrease

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

Expansion: Increase Contraction: Decrease

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

Expansion: Increase Contraction: Decrease

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

Expansion: Increase Contraction: Decrease

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

Expansion: Decrease Contraction: Increase

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

Expansion: Decrease Contraction: Increase

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

Expansion: Decrease Contraction: Increase

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

Peak: Increase Trough: Decrease

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

Peak: Increase Trough: Decrease

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

Peak: Increase Trough: Decrease

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

Peak: Increase Trough: Decrease

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

Peak: Increase Trough: Decrease

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

Peak: Increase Trough: Decrease

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

Peak: Decrease Trough: Increase

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

Peak: Decrease Trough: Increase

A recession occurs when:

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.

A depression occurs when:

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

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:

Leading indicators Coincident indicators Lagging or confirming indicators

Leading Indicators

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.

Remember that stocks are a leading indicator, which means:

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.

Coincident Indicators

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.

Lagging or Confirming Indicators

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.

Inflation

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

The two most common measures of inflation are:

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

The Consumer Price Index (CPI) program produces:

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

The Producer Price Index (PPI) program measures:

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

Inflation erodes or reduces the:

Purchasing power of money.

Deflation

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

Disinflation

A reduction in the rate of inflation.

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

D. Increase the target federal funds rate

Chapter 7 Bankruptcy

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.

Advantages of Chapter 7 Bankruptcy:

- 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.

Disadvantages of Chapter 7 Bankruptcy:

- 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.

Chapter 13 Bankruptcy

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.

Advantages of Chapter 13 Bankruptcy:

- 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.

Disadvantages of Chapter 13 Bankruptcy:

- 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.

Common Situations for Chapter 13:

- 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.

The Bankruptcy Act of 2005

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.

Summary of Key Changes Under the BAPCPA:

- 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.

Debts and obligations that are not generally dischargeable:

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

Chapter 11 Bankruptcy

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.

Pros of Chapter 11 Bankruptcy:

- 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.

Cons of Chapter 11 Bankruptcy:

- 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.

Common Situations for Chapter 11:

- 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.

The Consumer Credit Protection Act

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.

Key Provisions of the Consumer Credit Protection Act:

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

Key Benefits of the Consumer Credit Protection Act:

- 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.

Regulation Z

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.

Regulation Z requires several disclosures:

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

Fair Credit Reporting Act (FCRA)

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.

Fair Credit Billing Act

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.

Equal Credit Opportunity Act

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.

Electronic Fund Transfer Act

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).

Consumer Credit Reporting Reform Act

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.

Fair Debt Collection Practices Act

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.

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

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.

Servicemembers Civil Relief Act (SCRA)

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.

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?

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.

Privacy Act of 1974

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.

Fair and Accurate Credit Transaction Act of 2003 (FACTA)

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.

Phishing

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.

Skimming

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.

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

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.

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

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).

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.

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.

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.

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.

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.

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.

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

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.

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

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.

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.

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

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

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.

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.

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).

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

C. Both I and II

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.

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

Which of the following economic activities represents an example of monetary policy? I. The discount rate is increased. II. Congress passes a tax cut. III. Bank reserve requirements are lowered by the Federal Reserve. IV. The Federal Open Market Committee sells securities. A) I, III, and IV B) I, II and III C) I and IV D) II, III, and IV

A) I, III, and IV The answer is I, III, and IV. Tax legislation is fiscal, not monetary policy. The Federal Reserve Bank controls monetary policy by increasing or decreasing reserve requirements for member banks, increasing or decreasing the discount rate, and purchasing or selling government securities. The federal government controls fiscal policy by increasing or decreasing taxes, increasing or decreasing government expenditures, and purchasing or selling securities in the open market (surplus/deficit spending).

The Federal Reserve can take all of the following actions if it wants to follow a restrictive monetary policy except A) lower income tax rates. B) raise the discount rate. C) sell government securities. D) raise the reserve requirement.

A) lower income tax rates. The answer is lower income tax rates. Lowering income taxes would be a part of a fiscal policy strategy.

Which of the following is NOT characteristic of the Consumer Credit Reporting Act? A) Protection against unauthorized credit card use is provided. B) Applicants who are denied credit must be offered the reason. C) Credit bureau reports must include accurate, relevant, and recent information. D) Access to a credit file is limited to bona fide users of financial information.

A) Protection against unauthorized credit card use is provided. The answer is protection against unauthorized credit card use is provided. Statement 1 is incorrect; protection for unauthorized credit card use is provided by the Consumer Credit Protection Act.

Under the laws of most states, which of the following is exempt from creditors in a Chapter 7 bankruptcy? A) Student loan proceeds B) A home, regardless of value C) Recent federal income taxes due D) Pension benefits

D) Pension benefits The answer is pension benefits. In most states, pension benefits are exempt from creditors once an individual files for bankruptcy. Although a homestead may be exempt, there is usually a cap or ceiling on the value of the home that may be protected.

Which of the following is a provision of the Bankruptcy Act of 2005? I. Debtors who want to file for Chapter 7 bankruptcy are first required to submit to credit counseling. II. Individuals who have the ability to pay their debts are required to file under Chapter 7 of the Federal Bankruptcy Code. A) Both I and II B) I only C) Neither I nor II D) II only

B) I only The answer is I only. Individuals who have the ability to pay their debts are required to file under Chapter 13 of the Federal Bankruptcy Code.

Which of these might cause an increase in supply? I. A decrease in productivity II. Fewer sellers in the marketplace III. More efficient technology IV. Increasing the income tax A) I and III B) II and IV C) II and III D) III only

D) III only The answer is III only. A key element that affects supply is the cost of production. More efficient technology will decrease the cost of production.

The demand curve shows that: A) demand for a product varies inversely with price. B) there is a direct relationship between changing prices and total receipts. C) consumers select alternative ways of spending income. D) the relative change in price is caused by changes in demand.

A) demand for a product varies inversely with price. The answer is demand for a product varies inversely with price. The demand curve shows that, all else being equal, when the price of a good rises, demand decreases and vice versa.

Which of the following occurs when the price of a product decreases and consumers buy more of that product? A) The product is a complementary product. B) A change in inelastic demand has taken place. C) A change in quantity demanded has taken place. D) An increase in supply has occurred.

C) A change in quantity demanded has taken place. The answer is a change in quantity demanded has taken place. The demand curve shows that the quantity demanded for a product varies inversely with its price.

Which of the following interest rates is directly controlled by the Federal Reserve Board? A) Federal funds rate B) Reserve rate C) Discount rate D) Prime rate

C) Discount rate The answer is discount rate. The only interest rate the Federal Reserve Board directly controls is the discount rate, which is the rate at which banks can borrow from any of the Federal Reserve Banks. The Fed targets, not controls, the federal funds rate (the interest rate charged on short-term borrowing between banks) in its interest rate decisions.

Which of the following best describes deflation? A) Indicates a decline in the rate of inflation B) Prices are falling in absolute terms, bond prices rise, and purchasing power increases C) A decline in the general price level and is often caused by an increase in the money supply and consumer demand D) Occurs when inflation and unemployment rise and the general growth of the economy is slow as business output falls

B) Prices are falling in absolute terms, bond prices rise, and purchasing power increases The answer is prices are falling in absolute terms, bond prices rise, and purchasing power increases. A deflationary period also can be a time during which real assets perform poorly, thus real estate, collectibles, and gold and other precious metals are likely to fall in value.

Purposes of the Federal Reserve include: I. establishing the prime rate. II. influencing and monitoring the flow of capital. III. establishing federal income tax rates. IV. maintaining steady economic growth with moderate inflation. A) II only B) II and IV C) II, III, and IV D) I, III, and IV

B) II and IV The answer is II and IV. Commercial banks establish the prime rate. The executive branch or Congress initiates any changes regarding federal income tax rates with legislation. Controlling the flow of capital to maintain steady economic growth with moderate inflation is the primary purpose of the Fed.

Which of the following statements regarding supply is CORRECT? I. Generally, the higher the price that can be obtained, the higher the quantity supplied. II. The supply curve is usually represented as sloping downward from left to right. A) Neither I nor II B) II only C) Both I and II D) I only

D) I only The answer is I only. A higher price level usually results in a higher level of supply, which is represented by an upward-sloping curve from left to right.

Which of these types of information must be included in loan documents under Regulation Z of the Truth in Lending law? A) All of these B) Charges for late payments C) Right of rescission D) Prepayment information

A) All of these The answer is all of these. Charges for late payments, the lender's right of rescission, and prepayment information are all part of the information required. Other required information includes when payments begin, the amount financed, and the annual percentage rate.

Which of the following are methods of protecting against identify theft? I. Monitoring bank accounts II. Regularly inspecting credit reports III. Reviewing financial and billing statements IV. Closing accounts that appear to have suspicious activity A) III and IV B) I, II, and IV C) I, II, III, and IV D) I, II, and III

C) I, II, III, and IV The answer is I, II, III, and IV. All of these are prudent measures individuals should take to protect themselves against identity theft.

Recently, Congress has been pursuing deficit spending policies. In addition, the Federal Reserve is considering decreasing the discount rate and entering the open market to purchase existing Treasury securities. If these alternatives are pursued, what is the likely effect, if any, on the amount of bank loans? A) Lending activity will decrease. B) Disintermediation will occur such that investors will seek other sources of funds. C) Lending activity will increase. D) These actions will cause no impact on the amount of bank loans.

C) Lending activity will increase. The answer is lending activity will increase. Both Congress and the Federal Reserve are pursuing expansionary policies. As a result, the amount of reserves available to banks will increase, leading to additional lending activity. Note that the fiscal policy of deficit spending has no direct impact on the amount of bank loans, although expansionary policies do encourage further lending activity.

If the Consumer Price Index (CPI) is down but consumer demand is up, the economy is likely in which stage of the business cycle? A) Peak to contraction B) Contraction to trough C) Recovery to expansion D) Recovery to trough

C) Recovery to expansion The answer is recovery to expansion. As prices trend downward and consumer demand increases, the economy is moving from recovery to expansion. As demand continues to increase, assuming supply remains constant, upward pressure will be put on prices through the expansion to the peak.

Deflation is: I. characterized by rising unemployment. II. caused by a reduction in the money supply. III. the opposite of inflation. IV. a decline in the rate of inflation. A) I and IV B) I, II, and III C) II and III D) I, II, III and IV

B) I, II, and III The answer is I, II, and III. Disinflation, not deflation, is characterized by a decline in the rate of inflation.

The Fair Debt Collection Practices Act prohibits debt collectors from engaging in all of the following practices except A) contacting a debtor at his place of employment if the employer objects. B) contacting third parties about the payment of the debt without court authorization. C) seeking a court order for wage garnishment to satisfy a legal judgment. D) harassing or intimidating a debtor or using false and misleading approaches.

C) seeking a court order for wage garnishment to satisfy a legal judgment. The answer is seeking a court order for wage garnishment to satisfy a legal judgment. 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.

Landry Plumbing, Inc., filed for bankruptcy under the reorganization provisions of Chapter 11 of the Federal Bankruptcy Code. A plan of reorganization was confirmed, and a final decree closing the proceedings was entered. Which of the following statements is CORRECT? A) A trustee will continue to operate the debtor's business. B) Landry Plumbing, Inc., will not be allowed to continue in the same business. C) Landry Plumbing, Inc., will now be liquidated. D) Landry Plumbing, Inc., will have negotiated with all creditors, except as otherwise provided in the plan and applicable law.

D) Landry Plumbing, Inc., will have negotiated with all creditors, except as otherwise provided in the plan and applicable law. The answer is Landry Plumbing, Inc., will have negotiated with all creditors, except as otherwise provided in the plan and applicable law. At the conclusion of Chapter 11 proceedings, a corporate debtor has negotiated with creditors for most of the debts of the business. Exceptions to negotiated debts include debts that are provided for in the plan of reorganization (approved by the creditors and the court) and certain non-dischargeable debts.

All of the following economic activities represent government fiscal policy except A) reducing marginal income tax rates. B) cutting the discount rate. C) increasing marginal income tax rates. D) increase purchases of goods and services.

B) cutting the discount rate.

Which of the following statements regarding demand is CORRECT? I. Generally, the higher the price level, the lower the level of demand. II. The demand curve is usually represented as sloping upward from left to right. A) I only B) Neither I nor II C) II only D) Both I and II

A) I only The answer is I only. A higher price level usually results in a lower level of demand, which is represented by a downward-sloping curve from left to right.

Which of these describes why changes in supply occur? I. Changes in the cost of inputs II. Changes in productivity III. Changes in technology IV. Changes in taxes A) II and III B) I and II C) III only D) I, II, III, and IV

D) I, II, III, and IV The answer is I, II, III, and IV. All of these affect the amount of supply.

Which of the following best describes stagflation? A) A decline in the general price level and is often caused by a reduction in the money supply and consumer demand B) Denotes an increase in the general level of prices C) Occurs when inflation and unemployment rise and the general growth of the economy is slow as business output falls D) Indicates a decline in the rate of inflation

C) Occurs when inflation and unemployment rise and the general growth of the economy is slow as business output falls The answer is occurs when inflation and unemployment rise and the general growth of the economy is slow as business output falls. Stagflation occurred in the United States during the 1970s, when rapidly rising oil prices caused consumer prices to rise sharply and businesses to cut back production.

Which of the following confirms the current state of the economy? A) Changes in investor sentiment B) Unemployment rate C) Housing starts D) Orders for durable goods

B) Unemployment rate The answer is unemployment rate. The unemployment rate is a coincident indicator—it confirms the current state of the economy. The other choices are leading indicators—they indicate which direction the economy is heading.

If the demand for an item changes greatly when its price changes, the item is considered A) elastic. B) inelastic. C) disinflated. D) at equilibrium.

A) elastic. The answer is elastic. Elastic goods are typically luxury items. The demand for these goods may change greatly when their prices change because they are not necessities.

If the Consumer Price Index (CPI) is up and consumer demand is down, the economy is likely in which stage of the business cycle? A) Recovery to trough B) Peak to contraction C) Recovery to expansion D) Contraction to trough

B) Peak to contraction The answer is peak to contraction. As prices trend upward and consumer demand decreases, the economy is moving from peak to contraction. As demand continues to decrease, assuming supply remains constant, downward pressure will be put on prices through the contraction to the trough.

Under the bankruptcy laws, which of the following will NOT be discharged? I. Credit card debt used to pay college tuition (within the past three years) II. Taxes from four years ago in which the taxpayer purposely failed to report $10,000 of self-employment income III. Alimony A) II and III B) I and II C) I only D) I, II and III

A) II and III The answer is II and III. Credit card debt may be discharged. Alimony or back taxes resulting from failure to report income cannot be discharged.

The type of bankruptcy in which a person is freed from most debts in exchange for giving creditors assets that legally may be seized is called A) Chapter 7 bankruptcy. B) Chapter 9 bankruptcy. C) Chapter 13 bankruptcy. D) Chapter 11 bankruptcy.

A) Chapter 7 bankruptcy. The answer is Chapter 7 bankruptcy. Chapter 13 bankruptcy is one in which a plan is created for the debtor to repay outstanding debts within a specified time period. Frequently, the amount owed is reduced so that payments will be manageable.

Which of these assets are generally exempt from creditor claims in a Chapter 7 bankruptcy? I. Disability income benefits II. Proceeds from any annuity contracts A) I only B) Neither I nor II C) II only D) Both I and II

D) Both I and II The answer is both I and II. These assets are generally exempt from creditor claims in bankruptcy. A person's homestead, pension, and retirement plan rights (ERISA plans), proceeds from annuity contracts, and some limited amount of personal property are also exempt.

Which of the following claims will NOT be discharged in bankruptcy? A) A claim that arises from alimony or maintenance other than a lump-sum property settlement B) A claim brought by a secured creditor that remains unsatisfied after the sale of the collateral C) All of these claims will be discharged D) A claim brought by a judgment creditor whose judgment resulted from the debtor's negligent operation of a motor vehicle

A) A claim that arises from alimony or maintenance other than a lump-sum property settlement The answer is a claim that arises from alimony or maintenance other than a lump-sum property settlement. Debts arising from alimony, maintenance, and child support may not be discharged in bankruptcy court. This does not include lump-sum property settlement awards.

Assume that business is vibrant and that businesses need more loans from banks to expand their operations. This will increase the ?, resulting in an increase in the interest rates charged by banks.

demand for money.

Should the Fed decide that increasing the money supply will not be inflationary, it may then decide to increase the supply of money, thereby causing the supply curve to move DOWNWARD OR UPWARD (?) to the right; this would cause interest rates to fall back near the old equilibrium point.

downward.

Because ? measures activity by ownership and takes into account any production by a company both in-and outside the home country, it is not as widely followed. Most individuals are concerned most about what is happening within their own borders, and that is what GDP measures.

GNP

In recent years, Congress has conducted a policy of deficit spending, meaning that ?, 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.

government expenditures exceed revenues.

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

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

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

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

When the Fed raises the discount rate, it increases the ? and discourages member banks from borrowing funds, resulting in a contraction of the money supply.

cost of borrowing.

? is 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.

The prime rate.

? is 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.

The federal funds.

Low inflation (falling Consumer Price Index [CPI]) is a characteristic of the ? phase.

expansionary.

The economy needs low inflation to get things started and maintain expansion. However, as the economy starts to heat up (increasing demand), inflation (rising CPI) may rise on the way to the peak. As a result, the Fed may choose to ? to curb inflation.

raise interest rates.

The following items are what sort of indicators? – 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.

leading indicators.

The following items are what sort of indicators? – industrial production, – level of personal income, and – amount of corporate profits.

coincident indicators.

The following items are what sort of indicators? – prime interest rates, – changes in CPI, particularly for services, – amount of business and consumer loans outstanding, and – average duration of unemployment.

lagging or confirming indicators.

What are the two most common measures of inflation?

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

Inflation erodes or reduces the ?. Therefore, when inflation occurs, each dollar of income will buy fewer goods and services.

purchasing power of money.

When was the last time the US experienced deflation?

the depression of the 1930s.

In general, a ? period is one where preservation of capital should be of primary concern; investments should center on very high-quality debt instruments.

deflationary.

Bond prices rise and purchasing power INCREASES/DECREASES during deflation.

increases.

? is the worst of both worlds, combining high unemployment and high inflation.

Stagflation.

Under chapter 7 bankruptcy, the debtor is NOT required to give up what kinds of payments received?

- social security benefits - pension benefits - unemployment compensation - alimony - all or a portion of the cash values of life insurance and annuities (many states allow this)

Under chapter 7 bankruptcy, what debts cannot be discharged?

- student loans** - unpaid taxes** - child support - alimony debts - 401(k) loans **it's extremely rare that these are forgiven.

What is the normal time period that someone under chapter 13 bankruptcy would have to pay all of their outstanding debts?

3 to 5 years.

How often is the limit of protection for the Bankruptcy Act of 2005 adjusted?

Every three years.

Individuals who consider filing for bankruptcy protection must first receive a briefing from an approved ? (nonprofit only) service. Individuals must also complete an approved ? instructional course, which they must pay for themselves.

budget and counseling; personal financial management.

After filing under Chapter 7, an individual must now wait ? years before filing again (previously, a six-year hiatus was required).

8

Any individual, business, or corporate debtor who is eligible for Chapter 7 liquidation (except stockbrokers, commodities brokers, and railroads) is also eligible for ? bankruptcy (reorganization).

chapter 11

The credit card holder is liable for only ? of unauthorized charges if they report to the issuer that the credit card has been lost or stolen. In practice, credit card companies often reduce this to $0, but the law states that they can hold the holder liable for up to ? for unauthorized charges.

$50

The ? 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.

Fair Credit Billing Act