Chapter 1 Questions

Which of the following strategies is most likely to increase your confidence about your financial future? I. Saving money on a regular basis II. Paying down debt as quickly as possible III. Borrowing money to improve GDP.

I & II only

Your ability to earn money over the working lifetime is called: - social wealth - human capital - human wealth - social capital

human capital

Bud is 43 years old. He would like to retire at age 67 and move to the Caribbean. What is Bud's goal time horizon? - Short-intermediate term - Intermediate-long term - Long term - Short term

long term

"I want to retire with $1,000,000 in the bank" represents what element of a SMART goal? - Specific - Timely - Attainable - Realistic

specific

Based on findings from the Marshmallow experiment, about what percentage of Americans fall prey to time temptation (i.e., not willing to wait)? - 50% - 70% - 20% - 90%

70%

Which of the following is most clearly a personal financial strength? - A willingness to save money on a regular basis - A willingness to borrow money for day-to-day purchases - A willingness to postpone future goals in pursuit of current objectives - All of these answer choices are correct

A willingness to save money on a regular basis

Which of the following statements is true? - Converting human capital to financial wealth depends on wise planning and management. - Just before retirement, your financial wealth and human capital are both at their maximum levels. - As your financial wealth increases, your human capital remains unchanged over your life span. - As you age, your financial wealth remains constant but your human capital declines.

Converting human capital to financial wealth depends on wise planning and management

In the short term, what might happen if all Americans suddenly learned the foundational concepts of personal finance—they borrowed less, saved more, and spent less—and changed their behavior immediately? - More lottery tickets would be purchased because consumers would have more money to spend. - GDP would fall because consumers would spend less on goods and services. - GDP would increase because the government would have more investments to tax. - Confidence about the future would decline because consumers would know what it is going to take to retire and live a comfortable life.

GDP would fall because consumers would spend less on goods and services.

Which of the following statements about a person's health and wealth is false? - Healthy people spend more money on food and exercise, which reduces their lifetime wealth accumulation - Unhealthy people may be forced to retire earlier than planned, which will reduce income and wealth accumulation - Unhealthy people tend to work less, which reduces annual earnings and savings - Someone who gets seriously ill may become disabled and be forced out of the labor market, which will reduce income and wealth accumulation.

Healthy people spend more money on food and exercise, which reduces their lifetime wealth accumulation

Which of the following strategies is most likely to increase your confidence about your financial future? I. Applying your financial knowledge. II. Organizing your finances to achieve your personal goals. III. Borrowing money to improve GDP. - I only - II only - I and II only - I, II, and III

I and II only

Your friend Lucia is a procrastinator. How can you best help her overcome this weakness? I. Create deadlines. II. Encourage hyperbolic discounting. III. Strengthen her confirmatory bias.

I only

Which of the following is the reason those with a short-term time horizon should be cautious when investing their assets? - The tax rate for short-term gains can reduce the value of the assets - If the value of the assets were to fall, there may not be enough time to recoup the loss - It takes too much time to match the risk profile of a portfolio to the risk tolerance of the investor - This rule only applies to older investors who may not live long enough to enjoy the benefits of their investments

If the value of the assets were to fall, there may not be enough time to recoup the loss

Terry loves to ski, play competitive dodgeball, and go mountain climbing. If asked, Terry would consider sky diving as a hobby. Which of the following statements about Terry is true? - Terry's financial risk tolerance is likely very high - Given the inverse relationship between financial risk tolerance and general behavior, Terry's financial risk tolerance is moderately low - Terry's perception of financial risks mirrors that of her non-financial behavior - It is impossible to know what Terry's financial risk tolerance is given the information provided

It is impossible to know what Terry's financial risk tolerance is given the information provided

Takashi is a foreign-exchange engineering student. His English skills are limited but given his major in college, this has not been a big problem. Jorge is also a foreign-exchange student. He is studying finance and is active in his fraternity. Kim is not enrolled in college. She works 40 to 50 hours a week as a warehouse supervisor; when she is not working, she prefers reading books. Who is most likely to have the highest social capital today and in the future? Takashi Jorge Kim Both Takashi and Jorge because they are enrolled in college

Jorge

Mike earned his bachelor's degree in history 3 years ago and started working shortly thereafter as a teacher. Michelle earned her high school degree 5 years ago and took a job right out of school. Maria earned her associate's degree last year and started work right after graduation. During the next economic recession, who is generally, most likely to be unemployed? - Mike - Michelle - Maria - Each has an equal probability of becoming unemployed

Michelle

Which of the following people is most likely to be considered financially knowledgeable? - Jamie, who has low self-confidence, likes to gamble, and rarely tracks news stories online. - Todd, who exhibits self-control but is not self-confident or financially experienced. - Michelle, who gives regularly to charity, reads about investing, and is self-confident. - John, who lives day-to-day and is experienced with investing but sometimes spends more than he earns.

Michelle, who gives regularly to charity, reads about investing, and is self-confident.

Which of the following statements are true? -A person's time orientation can never be changed -Most Americans naturally tend to hold a future time orientation -People who hold a past negative time orientation have a hard time saving for the future -None of the other statements are true

Most Americans naturally tend to hold a future time orientation

Which of the following is an example of a heuristic? - Two plus two equals four - Never buy stocks on a Monday - Income minus expenses equals savings - Both two plus two equals four and income minus expenses equals savings are heuristics

Never buy stocks on a Monday

Barbara is considering two career and educational options, both of which she is excited about. Both options would cost approximately $86,000 in tuition, room, living expenses, books, travel, and fees. Pursuing Option 1 would lead to a job after graduation earning approximately $35,000 per year. Option 2 would lead to a job after graduation earning approximately $40,000 per year. Based on this information, which option has the shortest payback period? - Option 1 - Option 2 - Option 1 and Option 2 have equal payback periods - Not enough information is given to answer the question

Option 2

Creating deadlines for yourself is an example of what type of decision-making strategy? - Automating good decisions - Confirmation bias - Pre-committing to decisions - Visualizing clear goals

Pre-committing to decisions

Arnold rarely thinks about his future. He loves to work out and spend time with friends living in the moment. Given his orientation, which of the following best describes Arnold's time orientation? - Present-fatalistic - Present-hedonistic - Future-transcendental - Past-positive

Present-hedonistic

Which of the following is an example of an external motivation factor? - Feeling good about yourself - Receiving a bonus - Reaching a dream - Feeling good about yourself, receiving a bonus, and reaching a dream

Receiving a bonus

Nick, a skilled welder, had been working for 12 years in a factory that recently closed. This has caused high unemployment in his town and region. If Nick is concerned about maximizing his human capital and lifetime wealth accumulation, which action would be most beneficial? - Attend community workshops to learn how to manage household expenses with less income - Relocate to a place where his welding skills will be valued in the market place - Increase his posts to social media websites so that others will be more aware of him - Lose weight and improve his grooming to enhance his perceived human capital

Relocate to a place where his welding skills will be valued in the market place

Some firms entice consumers into long-term contracts using low introductory rates. Once the initial contract term has ended, the firm increases the cost of the service. Firms know that few consumers leave when the prices increase. These firms are relying on what behavioral economics bias? - Overconfidence - Optimism - Status quo - Loss aversion

Status quo

Lance is 25 years old, well-educated, and a smoker. Rob is 35 years old, well-educated, and regularly texts while driving. Tammy is 40 years old, well-educated, drinks a glass of orange juice daily, and exercises regularly. Who has the most human capital potential? Lance Rob Tammy Given their educational achievement, they are all similar

Tammy

Which of the following relationships accurately describes the role of financial risk-taking and wealth accumulation? - The greater the risk taken, the lower the long-term return - The greater the return required, the greater the risk that must be taken - The lower the return, the higher the risk - The greater the risk taken and the lower the long-term return, the higher the wealth accumulation

The greater the return required, the greater the risk that must be taken

Who is most likely to accumulate more wealth? - The person who is willing to take big gambles - The person who likes to gamble and play the lottery - The person who takes a slow-and-steady low-risk approach - The person who is willing to take risk after adequate research

The person who is willing to take risk after adequate research

What helps explain why some people play the lottery even when they know the odds of winning are astronomically low? - They view playing the lottery as a form of entertainment - They have a relatively low level of financial literacy - They prefer low-risk investments - They have a relatively low level of financial literacy and they view playing the lottery as a form of entertainment

They have a relatively low level of financial literacy and they view playing the lottery as a form of entertainment

When viewing general life outcomes, who is more likely to fare better in the future? - Those who resist temptation today - Those who give in to temptation today - Those who resist formalizing goals today - Those who are impulsive and quick acting

Those who resist temptation today

______________ connects you with people with whom you would not usually socialize. - Bridging social capital - Extended capital structure - A formal network - Bonding social capital

a formal network

Recently, a major fast-food chain saw its sales drop dramatically after the media reported that hundreds of people got sick eating at one location. In fact, sales across the country fell although competing chains saw no change in sales. This can be attributed to: - a sudden change in preference for different foods among consumers - a general change in perceptions about the chain's quality of food - a decrease in willingness to eat at fast-food chains among consumers - a increase in firsthand experiences of food quality among consumers

a general change in perceptions about the chain's quality of food

Having bills automatically paid so you are never late when making a payment is an example of: setting clear goals. automating good decisions. precommitting to decisions. automating good decisions and precommitting to decisions.

automating good decisions

People who _________ are less likely to feel that they are in control of their financial future. - are knowledgeable about money issues - believe that they can control their own destiny - believe strongly in luck and fate - understand the nature of risks and returns

believe strongly in luck and fate

Someone who erroneously attributes outcomes to skill rather than chance, while ignoring indications that would undermine perceptions of skill, is prone to: - optimism bias - confirmatory bias - status quo bias - hyperbolic discounting

confirmatory bias

What is the single largest component of the U.S. GDP? - Consumer spending - Business investment - Government spending - The rate of unemployment

consumer spending

Low-risk investments most often: - lead to the best long-term gains - are generally favored by those with high levels of experience and knowledge - generate the lowest returns - provide the greatest potential to generate wealth over the life span

generate the lowest returns

Now that Graham has graduated college, he is facing several changes in his life. He was recently married and started a new job in a large city. Which of the following events is going to have the highest cost over Graham's life? - Purchasing a new car - Having and raising a child - Paying for vacations on a yearly basis - Paying his undergraduate student loans

having and raising a child

Short-term financial goals: - help you reach your short-term financial objectives - are more challenging to meet compared to long-term goals - help you reach your long-term goals - are designed to help you develop SMART goals

help you reach your long-term goals

Financial knowledge refers to: - how well you manage the financial stressors in your life - how well you understand personal finance information - how well you score on standardized measures of personal finance - your maximum score on a comprehensive consumer finance test

how well you understand personal finance information

Jerry recently earned $200 on an investment. Unfortunately, the investment fell in value, and he lost $200. Afterward, Jerry felt miserable. He hated losing the money much more than he enjoyed seeing the investment grow. Jerry's experience is an example of: discounting loss aversion behavioral economics heuristic meditation

loss aversion

Nigel believes that most "rich people" obtained their wealth either through hard work or by investing wisely. Assuming Nigel adopts this same perspective as a guide to his own spending and saving behavior, he is most likely to become: - more knowledgeable about the financial marketplace over time and increase his personal wealth - disillusioned later in life as he nears retirement - a consistent purchaser of lottery tickets - both disillusioned later in life as he nears retirement and a consistent purchaser of lottery tickets

more knowledgeable about the financial marketplace over time and increase his personal wealth

Nellie just took a risk-tolerance quiz online and learned that she is in the bottom 10%. She should: - be satisfied knowing that she should only invest in low-risk financial products - not be worried because risk tolerance matters much less than risk preference for those whose goal it is to achieve life time wealth - not be worried because her risk tolerance will increase as her knowledge and experience increase - be worried because it is unlikely that her risk attitude will ever increase

not be worried because her risk tolerance will increase as her knowledge and experience increase

Financial risk tolerance can be considered: - on a scale that can change over time - as a fixed category, such as low or high - as a passing mood that changes daily - as a trait that declines over time

on a scale that can change over time

Ruby, age 50, is considering going back to school. She would like to retire at age 67. She currently earns $50,000 per year. If she goes back to college and completes a graduate degree, she will earn $55,000 per year. If the total cost of the graduate degree is $75,000, Ruby should: - go back to school because any investment in human capital is a wise money-management decision - go back to school because the net increase in human capital is greater than the cost of the education - only go back to school if the time and effort will result in an increase in personal satisfaction and fulfillment - not go back to school because the cost of the degree exceeds the extra income she will earn over her working life

only go back to school if the time and effort will result in an increase in personal satisfaction and fulfillment

Swarn is a risk-taker. His core life philosophy is that nothing bad can happen to him. When he thinks back over his life, he can't remember any serious negative events. When he looks ahead, he simply can't imagine a painful loss occurring to him. Swarn likely suffers from a(n): - cognitive evaluation bias - optimism bias - future discounting bias - loss-aversion bias

optimism bias

When asked, Sancho strongly agrees with the following statement: "I often think of what I should have done differently in my life." Given his answer, Sancho most likely holds what type of time perspective? - Past - Present - Future - Transcendental

past

When Todd thinks of investing in the stock market, he equates the action with terms like loss, risk, and danger. This is an example of Todd's: - risk capacity - risk tolerance - risk preference - risk perception

risk perception

Given a choice, John would like to invest in a safe and secure investment compared to investing in the stock market. This is an example of John's: - risk preference - risk perception - risk tolerance - risk need

risk preference

Melinda can take $500 today, or she can wait 1 year and receive $550. The good news is that Melinda does not need the money, so either way the money is a bonus. If she takes the money today, she'll put it in the bank and receive a 3% rate of return (so she would have a total of $515 a year from now). If Melinda does, in fact, take the $500 today, you could say that: - she is using hyperbolic discounting - she has an optimism bias - she feels that the likelihood of getting the full $550 is less than getting a guaranteed $515 - she has a status quo bias

she feels that the likelihood of getting the full $550 is less than getting a guaranteed $515

Mary sees no reason to change if what she is doing has worked in the past. Given her perspective, Mary may be exhibiting a(n): - loss-aversion bias - discounting bias - status quo bias - optimism bias

status quo bias

The way you view the financial world is shaped most profoundly by: - the news media and reports of GDP - your financial knowledge, financial risk-taking, and feelings of control over your situation - your teachers - your feelings about the world economy

your financial knowledge, financial risk-taking, and feelings of control over your situation