Module 6 The Economic Environment and Consumer Protection Laws Flashcards
If the demand for a product is inelastic, it means that
A)
the price of the product cannot be increased or decreased.
B)
an increase in the price would have no effect on the total amount spent on purchases of the product.
C)
an increase in the price would lead to a decrease in the total amount spent on purchases of the product.
D)
an increase in the price would lead to an increase in the total amount spent on purchases of the product.
The answer is an increase in the price would lead to an increase in the total amount spent on purchases of the product. Theoretically, if a product exhibits inelastic demand characteristics, an increase in the price would lead to an increase in the total amount spent to purchase the product.
LO 6.1.1
Dave is planning to refinance his mortgage with a local bank. While meeting with his banker, he is given a loan packet detailing the amount to be financed, the annual percentage rate (APR), and the loan’s terms and conditions. What legislation requires the bank to disclose this information to Dave?
A)
The Consumer Credit Protection Act
B)
The Fair Debt Collection Practices Act
C)
Consolidated Omnibus Budget Reconciliation Act
D)
The Banking Act of 1933
The answer is the Consumer Credit Protection Act. Also known as the Truth in Lending Act, the Consumer Credit Protection Act requires lenders, before extending credit, to disclose both the dollar amount of finance charges and the annual percentage rate (APR), as well as other loan terms and conditions. The Act also limits consumer liability for a lost or stolen credit card to the amount charged or a maximum of $50 per card, whichever is less. The requirements of this Act are often encountered when a consumer enters into a mortgage agreement with a lender and closes on a personal residence.
LO 6.2.2
What is the term used to describe the Federal Reserve’s controlling the money supply, enabling it to significantly affect interest rates?
A)
Consumer Price Index
B)
Monetary policy
C)
Fiscal policy
D)
Inflation
The answer is monetary policy. The Fed will follow an easy, expansionary policy when it wishes to increase the money supply and ultimately decrease interest rates and use a tight, restrictive policy when it wishes to decrease the money supply and ultimately increase interest rates.
LO 6.1.2
If the central monetary authorities want to slow the rate of inflation, the central bank should
A)
raise the discount rate to reduce the money supply; this will cause interest rates to rise and loan demand to fall, thereby decreasing demand for goods and services.
B)
decrease the discount rate to lower the market rate of interest; this will cause both costs and prices to fall.
C)
decrease taxes, which will reduce costs and cause prices to fall.
D)
buy government bonds to reduce the money supply; this will cause interest rates to rise and aggregate demand to fall.
The answer is raise the discount rate to reduce the money supply; this will cause interest rates to rise and loan demand to fall, thereby decreasing demand for goods and services. To slow inflation, the Fed needs to decrease the money supply, which it can do with several of the tools available to it. One tool is the discount rate; to decrease the money supply, the Fed raises the rate. When the money supply is reduced, loan demand falls because interest rates rise; then demand for products and services decreases. Buying government bonds increases the money supply. Raising taxes is a way to fight inflation.
LO 6.1.2
Which of these factors are typically present during an economic expansion?
A)
Demand and inflation are rising; unemployment and housing starts are declining.
B)
Housing starts and retail sales are rising; mortgage debt and consumer sentiment are declining.
C)
Retail sales and auto sales are rising; consumer credit is declining.
D)
Income and demand are rising; inflation and unemployment are declining.
The answer is income and demand are rising; inflation and unemployment are declining. Consumer sentiment will also be rising, and mortgage debt will be rising too as consumers feel more confident about the future and taking on debt. Retail and auto sales are rising, along with consumer credit as consumers purchase more goods.
LO 6.1.3
Inflation typically begins increasing during which phase of the business cycle?
A)
Inertia to trough
B)
Contraction to inertia
C)
Peak to contraction
D)
Expansion to peak
The answer is expansion to peak. Inflation is growing most rapidly as the business cycle approaches its peak. Inflation typically begins decreasing as the business cycle moves from peak to trough.
LO 6.1.4
A Chapter 13 bankruptcy has which of these characteristics?
The debtor is generally required to relinquish assets to discharge debts.
All debts are forgiven or discharged.
The debtor generally is not required to relinquish assets.
It is sometimes referred to as the wage earner plan.
A)
I and IV
B)
II and III
C)
III and IV
D)
I, II, and IV
The answer is III and IV. Under Chapter 13 bankruptcy, a plan is created under which the debtor will repay outstanding debts within a specified time period. Rather than debts being forgiven or discharged, they are included in the repayment plan.
LO 6.2.1
Which of these protections is not provided by the Fair Credit Reporting Act?
A)
The consumer is given the right to review his or her report at any time free of charge.
B)
If a consumer is denied credit, he or she has the right to receive a copy of the credit report provided by the credit bureau free of charge.
C)
If there are errors in the report, the bureau must correct them and, if requested by the consumer, submit the corrected report to any recipient of the report in the last six months.
D)
If the consumer and credit bureau do not agree regarding the facts contained in the report, the consumer has the right to include his or her version of the facts in the report.
The answer is the consumer is given the right to review his or her report at any time free of charge. A consumer who is denied credit has the right to receive a copy of the credit report provided by the credit bureau free of charge. However, the consumer may review his or her report at any time for a nominal charge, not for free. The credit bureau must correct errors in the credit report and submit the corrected report to any recipient of the report in the last six months. Where the consumer and the credit bureau do not agree regarding the facts contained in the credit report, the consumer is permitted to include his or her version of the facts in the report.
LO 6.2.2
Which of these statements regarding the Fair Credit Billing Act is CORRECT?
Requires creditors to respond within 60 days of the date that billing error complaints are received from consumers
Requires credit report bureaus to include accurate, relevant, and recent information regarding the financial status of credit applicants
A)
Neither I nor II
B)
Both I and II
C)
I only
D)
II only
The answer is neither I nor II. The Fair Credit Billing Act requires consumers to notify creditors in writing of any billing errors within 60 days of the date the billing statement is received. Creditors must then respond within 30 days of the date that billing error complaints are received from consumers. The Consumer Credit Reporting Reform Act requires that accurate, relevant, and recent information regarding the financial status of credit applicants be reported.
LO 6.2.2
The answer is neither I nor II. The Fair Credit Billing Act requires consumers to notify creditors in writing of any billing errors within 60 days of the date the billing statement is received. Creditors must then respond within 30 days of the date that billing error complaints are received from consumers. The Consumer Credit Reporting Reform Act requires that accurate, relevant, and recent information regarding the financial status of credit applicants be reported.
LO 6.2.2
The answer is demand is inelastic. Demand is inelastic if the quantity demanded responds relatively little to price changes.
LO 6.1.1
Which of these are measures of the Fair and Accurate Credit Transaction Act (FACTA) that provides consumers greater protection against identity theft?
Consumer information must be disposed of by companies in a secure manner.
Individuals can place alerts on their credit histories if identity theft is suspected.
Consumers can place alerts on their credit histories if deploying overseas in the military.
Consumers may obtain a free credit report every 12 months from each of the three national credit reporting agencies.
A)
I and II
B)
I and IV
C)
II, III, and IV
D)
I, II, III, and IV
The answer is I, II, III, and IV. FACTA added new sections to the federal Fair Credit Reporting Act to provide consumers greater protection against identity theft.
LO 6.2.2
The primary function of the Federal Reserve System (the Fed) is to
A)
carry out monetary policy.
B)
implement fiscal policy.
C)
manage the revenues and expenditures of the federal government.
D)
issue savings bonds to the general public.
The answer is carry out monetary policy. The Federal Reserve controls the money supply, enabling it to significantly affect interest rates. The Fed will follow a loose, or easy, monetary policy when it wants to increase the money supply to expand the levels of income and employment. In times of inflation, when it wants to constrict the money supply, the Fed will follow a tight monetary policy. The U.S. Treasury issues bonds to the general public to finance the budget deficits of the federal government.
LO 6.1.2
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)
Prepayment information
C)
Charges for late payments
D)
Right of rescission
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.
LO 6.2.2
Which of these statements regarding the Federal Reserve’s use of the discount rate is CORRECT?
The Fed will lower the discount rate in order to increase the money supply.
To curb inflation, the Fed will raise the discount rate.
If the Fed lowers the discount rate, banks will be able to borrow funds at lower rates.
To contract the money supply, the Fed will raise the discount rate.
A)
II and III
B)
I, II, III, and IV
C)
I, III, and IV
D)
II only
The answer is I, II, III, and IV. All of these statements are correct. To follow an expansionary (easy) monetary policy, the Federal Reserve will lower the discount rate. To institute a restrictive (tight) monetary policy, the Federal Reserve will raise the discount rate.
LO 6.1.2
Which of these statements regarding economic indicators is CORRECT?
Leading indicators are represented by bond yields and housing starts.
Examples of lagging indicators include the prime rate and orders for durable goods.
Economic indicators help determine the current stage of the business cycle.
Coincident indicators occur concurrently during the business cycle and confirm the stage the economy is currently experiencing.
A)
III only
B)
I, III, and IV
C)
I and II
D)
I, II, and III
The answer is I, III, and IV. Orders for durable goods are considered a leading economic indicator. In addition to the prime rate, lagging indicators include the change in the Consumer Price Index (particularly for services), the amount of business and consumer loans outstanding, and the average duration of unemployment.
LO 6.1.4
Which of these statements on economic indicators is CORRECT?
Changes in CPI, particularly for services, serve as a confirming indicator and usually change after the economy has passed through one business cycle and allow confirmation of a previous economic environment.
Indexes of stock prices, serve as a leading indicator, and tend to precede actual economic change.
A)
Both I and II
B)
Neither I nor II
C)
II only
D)
I only
The answer is both I and II. Changes in CPI are considered confirming, or lagging indicators, while indexes of stock prices serve as a leading indicator.
LO 6.1.3
All of these are examples of leading economic indicators except
A)
orders for durable goods.
B)
bond yields.
C)
industrial production.
D)
housing starts.
The answer is industrial production. Leading indicators are those that tend to precede actual economic change, such as changes in investor sentiment. Industrial production is an example of a coincident indicator that occurs simultaneously during the business cycle and confirms the stage the economy is currently experiencing.
LO 6.1.4
All of these are often used as leading indicators of a change in the economy except
A)
housing starts.
B)
stock market.
C)
average employment duration.
D)
durable goods orders.
The answer is average employment duration. Leading indicators include housing starts, new claims for unemployment, the direction of the stock market and interest rates, changes in investor sentiment, and orders for durable goods. Average duration of employment is a lagging or confirming indicator.
LO 6.1.3
Which term refers to the taxation, expenditures, and debt management of the federal government?
A)
Open market operations
B)
Fiscal policy
C)
Monetary policy
D)
Revenue code procedures
The answer is fiscal policy. Economic growth, price stability, and full employment are goals the government pursues through fiscal policy.
LO 6.1.2
Which of these best describes the economic phase in which unemployment increases and businesses operate at their lowest capacity levels?
A)
Contraction
B)
Trough
C)
Peak
D)
Expansion
The answer is trough. A trough in a business cycle occurs at the end of a contraction phase when businesses are operating at their lowest capacity levels.
LO 6.1.3
Which of these are characteristics of Chapter 13 bankruptcy provisions?
Repayment plan is implemented.
The debtor is typically not required to relinquish assets.
Debt payments may be reduced so payments are more manageable for the debtor.
Generally, Chapter 13 bankruptcy is less favorable for creditors than Chapter 7 bankruptcy.
A)
I, II, and III
B)
I, III, and IV
C)
IV only
D)
II and III
The answer is I, II, and III. Chapter 13 bankruptcy is generally more favorable for creditors because they receive at least some portion of what is owed. In a Chapter 13 bankruptcy, the debtor repays at least a portion of the debts over a specified time. Creditors may not receive any payments under a Chapter 7 bankruptcy.
LO 6.2.1
Which of these situations is not an example of where your knowledge of consumer protection laws could benefit clients?
A)
A client’s son has been having difficulty getting a job. He goes for interviews, but after a background check, he is not being hired.
B)
A client made a major purchase using credit from a door-to-door salesman last week and is now regretting it five days later.
C)
A client tells you they have lost their wallet and are concerned that it may have been stolen.
D)
A client tells you about her credit being denied, and she doesn’t know why.
The answer is a client made a major purchase using credit from a door-to-door salesman last week and is now regretting it five days later. You may know the provisions of the Consumer Credit Protection Act, which state that the client had three days to exercise the right of rescission, but that won’t be helpful here since the timeline has passed. Knowing the rules about lost or stolen credit cards can help you guide this client to appropriate action of notifying the credit and debit card companies. One can limit potential risks through this process. Knowing that the client can ask for this information to be corrected and all creditors who have run requests to be notified is helpful. Knowing that employers are asking for credit checks as part of a typical background check could be helpful. The son can contact the credit reporting agencies, review and ask for corrections, and have correct reports sent to any employers to whom he has applied in the last two years.
LO 6.2.2
Which of these is a way that identity thieves steal personal information?
By skimming, which involves stealing credit or debit card information by using a special storage device when processing these types of cards
By phishing, which involves posing as a financial institution or company and sending spam over the Internet to persuade an individual to provide personal information
A)
I only
B)
Neither I nor II
C)
II only
D)
Both I and II
The answer is both I and II. Both skimming and phishing are tactics used by identity thieves.
LO 6.2.2
Which of the following best describe(s) the actions of a fiscal policy economist?
Increase in government spending
Decrease in the money supply
Decrease in income taxes
Increase in the inflation rate
A)
II and IV
B)
I, II, III, and IV
C)
I and III
D)
I only
The answer is I and III. Fiscal policy economists believe that the economy can be controlled through the use of government spending and income tax adjustments. Statements II and IV describe economists who believe that economic activity is controlled through the use of the money supply.
LO 6.1.2
Which of the following statements best describes a downward sloping demand curve?
A)
Consumers demand more at lower prices.
B)
Consumer demand has not changed significantly.
C)
Consumer demand has increased significantly.
D)
Consumer demand has dropped drastically.
The answer is consumers demand more at lower prices. Consumers demanding more at lower prices describes a downward sloping demand curve.
LO 6.1.1
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 9 bankruptcy.
B)
Chapter 13 bankruptcy.
C)
Chapter 11 bankruptcy.
D)
Chapter 7 bankruptcy.
The answer is Chapter 7 bankruptcy. Chapter 11 applies mostly to businesses and Chapter 13 is one in which a plan is created for the debtor to repay outstanding debts within a specified time period.
LO 6.2.1
The responsiveness of the quantity demanded of a good to changes in the good’s price, other things being held constant, is called
A)
substitution effect.
B)
equilibrium.
C)
price elasticity.
D)
demand curve shift.
The answer is price elasticity. A good is elastic when its quantity demanded responds greatly to price changes (e.g., luxury items) and is inelastic when its quantity demanded responds little to price changes (e.g., food).
LO 6.1.1
Which of these obligations could possibly be reduced or eliminated in a personal bankruptcy?
A)
Student loans
B)
Installment payments
C)
IRS tax obligation
D)
401(k) loan
The answer is installment payments. Installment payments could potentially be reduced or eliminated in a personal bankruptcy. Student loans and IRS tax obligations will not be eliminated through bankruptcy. 401(k) loans will not be eliminated through bankruptcy because the lienholder is the client. If the client defaults on the 401(k) loan, the entire loan will be taxable as a distribution immediately.
LO 6.2.1
All of these statements regarding the provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the 2005 Bankruptcy Act) are correct except
A)
people who have the ability to pay their debts can choose between filing under Chapter 7 or filing under Chapter 13.
B)
the use of Chapter 7 is limited to the liquidation of credit bills or loans that are not secured.
C)
lenders must provide consumer information about the dangers of paying only minimum required payments on credit card debt.
D)
debtors who want to file for Chapter 7 must first undergo credit counseling.
The answer is people who have the ability to pay their debts can choose between filing under Chapter 7 or filing under Chapter 13. Under the 2005 Bankruptcy Act, people who have the ability to pay their debts must file under Chapter 13 (reorganization) rather than having their debts canceled entirely under Chapter 7.
LO 6.2.1
The federal funds rate will tend to move upward under which of these conditions?
A)
The Federal Reserve lowers the discount rate.
B)
The Federal Reserve is buying government securities.
C)
A few banks have reserve deficiencies, and the rest have ample excess reserves.
D)
A few banks have excess reserves, and the rest have significant reserve deficiencies.
The answer is a few banks have excess reserves, and the rest have significant reserve deficiencies. Short-term interest rates increase when the money supply is being tightened. Among the reasons why the money supply is tight is when banks are unable to meet their reserve requirements and must borrow from the Fed. If the banks have excess liquidity, then monetary policy is accommodative. When the Fed buys government securities or lowers the discount rate, it is increasing the money supply and interest rates will decrease.
LO 6.1.2
Which of these provisions are not part of the Fair Credit Reporting Act of 1971 (as amended)?
A standard method of reporting interest must be used.
The issuer of installment credit must provide written disclosures in easy-to-understand language.
A creditor who has denied credit must notify the consumer about which credit reporting agency provided information to the potential creditor.
Obsolete information must be deleted from a consumer’s credit report.
A)
III and IV
B)
I, II, and IV
C)
I, II, and III
D)
I and II
The answer is I and II. The Fair Credit Reporting Act requires potential creditors who have denied credit to notify the consumer about which reporting agency provided information to the creditor, and it requires that obsolete information be deleted from a consumer’s credit report. The establishment of a standard method of reporting interest and the written disclosure requirement both refer to Truth in Lending (Consumer Credit Protection Act).
LO 6.2.2
In a typical business cycle, which of the following phases would exhibit periods of increasing employment and increasing output?
A)
Expansion
B)
Recession
C)
Trough
D)
Peak
The answer is expansion. An expansion is indicated by rising employment and output. When employment and output are no longer rising, the cycle is at its peak. If employment and output begin to decrease, this indicates a recession. Finally, when employment and output are no longer decreasing, the cycle has reached a trough.
LO 6.1.3
