1
Q
What is economics?
A
- Study of production, distribution, and consumption.
- Study of choices in the presence of scare resources.
2
Q
What is microeconomics?
A
Study how individuals and companies make decisions to allocate scarce resources.
3
Q
What is macroeconomics?
A
Study of an economy as a whole.
Ex: Factors that affect a country’s economic growth
4
Q
What is the picture?
A
Supply and Demand Curve
5
Q
What is price elasticity?
A
The degree of movement in the quantity demanded in response to change in price.
6
Q
What are examples of inelastic goods?
A
Necessities (e.g., food, medicine, gas)
These things generally respond very little to price changes. You will continue to pay for them but you will complain more about it.
7
Q
What are examples of elastic goods?
A
Luxuries (New cars, phones, etc.,)
These things generally slow down more when the prices of them incease.
8
Q
Define what the equilibrium is?
A
Is the intersection of the supply and demand curves.
Prices should always move to equilibrium unless restricted by outside sources.
9
Q
Gross Domestic Product (GDP)
A
Total monetary value of all goods and services produced within the domestic US over the course of a given year.
10
Q
What is real GDP?
A
GDP after accounting for inflation
11
Q
What is the goal of monetary policy?
A
Affect economic activity by raising and lowering short-term interest rates because they affect consumer spending/demand
12
Q
Who controls monetary policy?
A
The federal reserve (The Fed)
They are A Political and are a separate organization than the Gov’t
13
Q
Who controls Fiscal policy?
A
Congress and the current administration/The President
14
Q
What is the goal of the Fiscal policy?
A
Attempts to influence consumer demand through governmental policies.
15
Q
What is in The Fed’s Monetary “Toolbox”
A
- Lowering or increasing the amount of required reserves that must be held by member banks
- Engaging in open-market operations
- Raising or lowering the discount rate
16
Q
What are open-market operations?
A
- Most common monetary policy tool
- The Fed will buy additional Gov’t securities to expand economic activity - Attempting to increases money supply and drives down interest rates
- The Fed will sell Gov’t securites from its exsisting inventory to contract economic activity - Attempting to decrease money supply and drive up interest rate
17
Q
What happens when The Fed buys additional Gov’t securities?
A
Attempting to increase money supply and drive down interest rates.
18
Q
What happens when The Fed sells Gov’t securities?
A
Attempting to decrease money supply and drive up interest rates
19
Q
Who controls the discount rate?
A
The Fed
20
Q
What is the discount rate?
A
Rate at which the banks can borrow from any Fed Reserve Bank
21
Q
What is the Fed Funds rate?
A
Charged on short-term borrowing between banks.
Fed sets a target for this rate.
22
Q
What is the Prime rate?
A
- Set by commercial banks and charged by commercial banks to its best customers.
- About 3% higher than the Fed Funds rate.
23
Q
What is in Congress’s Fiscal Policy “Toolbox”
A
- Makes changes in the Tax laws
- Increase and decreases Gov’t spending
- Finances deficits through borrowing by issuing new Gov’t securities
24
Q
Interest rates will tend to move downward when the Federal Reserve?
- Is selling government securities.
- Increases the discount rate.
- Decreases the reserve requirements for member banks.
- Approves lower personal income tax rates.
A
- Is selling government securities.
- Increases the discount rate.
- Decreases the reserve requirements for member banks.
- Approves lower personal income tax rates.
25
Which of the following practices would the Fed conduct if it wanted to contract the overall economy?
1. Decrease the Fed Gov'ts Budget
2. Increase the prime rate
3. Decrease the reserve requirements for member banks
4. Increase the target federal funds rate
1. Decrease the Fed Gov'ts Budget
2. Increase the prime rate
3. Decrease the reserve requirements for member banks
4. **Increase the target federal funds rate**
26
Which of the following types of information must be included in loan documents under Regulation Z of the Truth in Lending law?
1. All of these
2. Charges for late payments
3. Rights of rescission
4. Prepayment information
1. **All of these**
2. Charges for late payments
3. Rights of rescission
4. Prepayment information
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 information includes when payments begin, the amount financed, and the annual percentage rate.
27
Which term refers to the taxation, expenditures, and debt management of the federal government?
1. Fiscal Policy
2. Monetary Policy
3. Revenue Code Procedures
4. Open Market Operations
1. **Fiscal Policy**
2. Monetary Policy
3. Revenue Code Procedures
4. Open Market Operations
Economic growth, price stability, and full employment are goals the government pursues through fiscal policy.
28
All of the following statements regarding the provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the 2005 Bankruptcy Act) are correct except
1. People who have the ability to pay their debts can choose between filing under CH. 7 or filing under CH. 13
2. Debtors who want to file for CH. 7 first must undergo credit counseling
3. The use of Ch. 7 is limited to the liquidation of credit bills or loans that are not secured.
4. Lenders must provide consumer information about the dangers of paying only minimum required payments on credit card debt.
1. **People who have the ability to pay their debts can choose between filing under CH. 7 or filing under CH. 13**
2. Debtors who want to file for CH. 7 first must undergo credit counseling
3. The use of Ch. 7 is limited to the liquidation of credit bills or loans that are not secured.
4. Lenders must provide consumer information about the dangers of paying only minimum required payments on credit card debt.
Because under the 2005 Bankruptcy act, people **who have the ability** to pay their debts **MUST** file under **Ch. 13** rather than having their debts canceled entirely under Ch. 7
29
Which of the following protections is not provided by the Fair Credit Reporting Act (FCRA)?
1. The consumer is given the right to review his or her report at any time free of charge?
2. 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.
3. 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.
4. 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.
1. **The consumer is given the right to review his or her report at any time free of charge?**
2. 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.
3. 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.
4. 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 consumer may review his or her report at any time for a nominal charge, not for free.
30
Which of the following describes demand if the quantity demanded does not change significantly with a change in price?
1. Demand is fixed
2. Demand is unit neutral
3. Demand is elastic
4. Demand is inelastic
Demand is inelastic if the quantity demanded responds relatively little to price change.
1. Demand is fixed
2. Demand is unit neutral
3. Demand is elastic
4. Demand is inelastic
Demand is inelastic if the quantity demanded responds relatively little to price change.
31
You subscribe to Barron's and have noticed that the money supply has been increasing sharply on a weekly basis. Your advisor informs you that the Federal Reserve Board is responsible for the money supply growth. What are the tools the Fed uses to influence the money supply?
I. Changing Tax policy
II. Changing the discount rate
III. Buying or selling securities
IV. Changing bank reserve requirements
1. II, III, and IV
2. I only
3. III and IV
4. III only
1. **II, III, and IV**
2. I only
3. III and IV
4. III only
The Fed may use open-market operations, changes in the discount rate, or changes in the reserve requirement to affect the money supply. Only Congress changes tax policy.
32
If the central money authorities want to slow the rate of inflation, the central bank should
1. decrease the discount rate to lower the market rate of interest; this will cause both costs and prices to fall.
2. buy government bonds to reduce the money supply; this will cause interest rates to rise and aggregate demand to fall.
3. decrease taxes, which will reduce costs and cause prices to fall.
4. 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.
1. decrease the discount rate to lower the market rate of interest; this will cause both costs and prices to fall.
2. buy government bonds to reduce the money supply; this will cause interest rates to rise and aggregate demand to fall.
3. decrease taxes, which will reduce costs and cause prices to fall.
4. **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.
33
The responsiveness of the quantity demanded of a good to change in the goods to change in the good's price, other things being held constant, is called
1. Price elasticity
2. Substitution effect
3. Equilibrium
4. Demand Curve Shift
1. **Price elasticity**
2. Substitution effect
3. Equilibrium
4. Demand Curve Shift
A good is elastic when its quantity demanded responds greatly to price changes (e.g., luxury goods)
34
Which of the following situations illustrate an inelastic supply or demand?
1. Gasoline sales decline slightly as gas prices rise 30%.
2. Yacht sales decline sharply shortly after the federal government initiates a luxury tax on boats costing more than $30,000.
3. The sharply rising price of corn causes grocery store cereal sales to decline less than 1%.
4. Shirley's Cakes lowers the price of its cakes by 10% and sees a 20% increase in volume
1. II and III
2. I and III
3. I, III and IV
4. I, II, and III
1. II and III
2. **I and III**
3. I, III and IV
4. I, II, and III
Luxury goods tend to have elastic demands, and necessities tend to have inelastic demands. Supply and demand is inelastic if the ratio of the percentage change in quantity divided by the percentage change in price is less than one; it is elastic if the ratio is greater than one.
35
All of the following economic activities represent fiscal policy except
1. Cuts to the Fed funds rate
2. Increases in purchases of goods and services
3. Tax increases to dampen consumption and discourage private investments
4. Tax cuts
1. **Cuts to the Fed funds rate**
2. Increases in purchases of goods and services
3. Tax increases to dampen consumption and discourage private investments
4. Tax cuts
The Fed sets the discount rate, upon which the fed funds rate is based. The fed will lower the discount rate when it wants to increase the money supply. When the gov't increases purchase
36
The anticipation of inflation suggests that the investor should
1. Anticipate higher interest rates
2. Buy bonds
3. Sell stocks of gold companies
4. Avoid real estate investments
1. **Anticipate higher interest rates**
2. Buy bonds
3. Sell stocks of gold companies
4. Avoid real estate investments
Real assets, gold and real estate amount them, should do well in inflationary times. Bonds do poorly because interest rates will increase to fight inflation, and increases in interest rates cause bond prices to fall.
37
Which of the following statements is true concerning bankruptcy?
1. Planners can rely on state laws to supersede federal laws in regard to property retention.
2. A debtor is generally not required to relinquish SS, UE, royalties, and alimony payments.
3. Student loan debt is often reduced in bankruptcy
4. A debtor may not file for bankruptcy again under Ch. 7 for six years.
1. **Planners can rely on state laws to supersede federal laws in regard to property retention.**
2. A debtor is generally not required to relinquish SS, UE, royalties, and alimony payments.
3. Student loan debt is often reduced in bankruptcy
4. A debtor may not file for bankruptcy again under Ch. 7 for six years.
It is true that planners can rely on state laws to supersede federal laws on property retention. Planners should rely on state laws for property retention. Debtors may be required to relinquish royalties.
38
What is the term used to describe the Fed's controlling the money supply, enabling it to significantly affect interest rates?
1. Monetary Policy
2. CPI (Consumer Price Index)
3. Inflation
4. Fiscal Policy
1. **Monetary Policy**
2. CPI (Consumer Price Index)
3. Inflation
4. Fiscal 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
39
A Ch. 13 bankruptcy has which of the following characteristics?
1. The debtor is generally required to relinquish assets to discharge debts.
2. All debts are forgiven or discharged
3. The debtors generally is not required to relinquish assets
4. It is sometimes referred to as the wage earner plan
1. III and IV
2. I, III, and IV
3. I, II, and III
4. I and II
1. **III and IV**
2. I, III, and IV
3. I, II, and III
4. I and II
Under Ch. 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.
40
Which of the following statements best describes a downward sloping demand curve?
1. Consumer demand has dropped drastically
2. Consumer demand has not changed significantly
3. Consumer demand more at lower prices
4. Consumer demand has increased significantly
1. Consumer demand has dropped drastically
2. Consumer demand has not changed significantly
3. **Consumer demand more at lower prices**
4. Consumer demand has increased significantly
Consumers demanding more a lower prices describes a downward sloping demand curve
41
Inflation typically begins increasing during which phase of the business cycle?
1. Expansion to peak
2. Contraction to inertia
3. Peak to contraction
4. Inertia to trough
1. **Expansion to peak**
2. Contraction to inertia
3. Peak to contraction
4. Inertia to trough
Inflation is growing most rapidly as the business cycle approaches its peak. Inflation typically beings decreasing as the business cycle moves from peak to trough.
42
The primary function of the Fed is to
1. Issue savings bonds to the general public
2. Implement fiscal policy
3. Carry out monetary policy
4. Manage the revenues and expenditures of the federal government
1. Issue savings bonds to the general public
2. Implement fiscal policy
3. **Carry out monetary policy**
4. Manage the revenues and expenditures of the federal government
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.
43
What is the most likely cause of an increase in the money supply?
1. Bank lending has decreased
2. Consumer demand has increased
3. The Fed has bought securities
4. Bank reserves have increased
1. Bank lending has decreased
2. Consumer demand has increased
3. **The Fed has bought securities**
4. Bank reserves have increased
Of the options given, the most likely cause of an increase in the money supply is that the Fed has bought securities, thus injecting money in to the banking system. A decrease in bank lending is typically caused by a decrease in available bank reserves, which in turn is caused by the Fed selling securities. Changes in consumer demand do not have a direct relationship to the money supply. An increase in bank reserves is a result of the increase in the money supply, not the cause.
44
Which of the following are characteristics of Ch. 13 bankruptcy provision?
1. Repayment plan is implemented
2. The debtor is typically not required to relinquish assets
3. Debt payments may be reduced so payments are more manageable for the debtor
4. Generally, Ch. 13 bankruptcy is less favorable for creditors than Ch. 7
1. I, II and III
2. IV only
3. II and III
4. I, III, and IV
1. **I, II and III**
2. IV only
3. II and III
4. I, III, and IV
Ch. 13 bankruptcy is generally more favorable for creditors because they receive at least some portions of what is owed. In Ch. 13 bankruptcy the debtor repays at least a portion of the debts over a specified time. Creditors may not receive any payments under a Ch. 7
45
When the Federal Reserve buys government securities, which one of the following results is most likely to occur?
1. Bond prices will rise, and stock prices will fall.
2. Bond and stock prices will rise.
3. Stock prices will rise, and bond prices will fall.
4. Bond and stock prices will fall.
1. Bond prices will rise, and stock prices will fall.
2. **Bond and stock prices will rise.**
3. Stock prices will rise, and bond prices will fall.
4. Bond and stock prices will fall.
When the Fed buys securities, it receives paper evidencing debt owed to it from the federal government, and it transfers cash to the sellers of those securities. This increases the money supply, causes interest rates to decrease and bond prices to rise, and encourages consumers and businesses to borrow money for purchases. The increasing demand for goods and services, in turn, causes stock prices to increase.
FP511 Module 7
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