Chapter 1 Quiz

rural (Your salary will be lower if you live in a rural area than if you live in a metropolitan area as salaries vary for different locations based on several factors like cost of living and supply of labor. See 1-5: What Determines Your Personal Income?)

An individual's salary will be lower if he or she lives in a(n) ______ area.

94 percent (Becky's Average Propensity to Consume = ($85,000 - $5,000) ÷ $85,000 = 94%. See 1-1: The Rewards of Sound Financial Planning.)

Becky graduated with a master's degree in personal financial planning. After working for 2 years in a small financial planning firm, Becky earns $85,000 annually and saves $5,000 a year after spending on her current needs. What is her average propensity to consume?

Ben will receive a significant amount at the end of the investment period, due to the feature of compounding. (One can accumulate more wealth by investing for 40 rather than 30 years. This is because of compound interest. Thus, Ben will receive a significant amount at the end of 40 years due to the compounding feature. See 1-3: From Goals to Plans: A Lifetime of Planning.)

Ben invests $10,000 at a rate of interest of 5 percent for 40 years. Which of the following statements about the return on the investment is true?

helps in improving professional satisfaction. (Careful career planning can improve an individual's work situation and help him or her gain greater personal and professional satisfaction. See 1-5: What Determines Your Personal Income?)

Career planning:

as soon as you start earning. (Ideally, retirement planning should begin as soon as one starts earning. This will help individuals save more for retirement and take advantage of the compounding effect of money. See 1-3: From Goals to Plans: A Lifetime of Planning.)

Ideally, retirement planning should begin:

minimize taxes. (Tax planning involves looking at individuals' current and projected earnings and then developing strategies that will defer and minimize taxes. See 1-3: From Goals to Plans: A Lifetime of Planning.)

Tax planning is most commonly done to:

communicate consistently about money matters with family members. (The best way for a family to handle financial decisions is to be aware of your family members' financial style, consistently communicate openly, and be willing to compromise. See 1-2: The Personal Financial Planning Process.)

The best way for a family to handle financial decisions is to:

develop a sound financial plan. (The best way to achieve financial objectives is through personal financial planning, which helps define personal financial goals and develop appropriate strategies to reach them. See 1-1: The Rewards of Sound Financial Planning.)

The best way to achieve your financial objectives is to:

inflation. (The most common measure of inflation, the consumer price index (CPI), is based on changes in the cost of consumer goods and services. See 1-4: The Planning Environment.)

The consumer price index (CPI) is a measure of:

consuming.(Tangible assets are physical assets such as real estate and automobiles. These assets can be held for either consumption (e.g., your home, car, artwork, or jewelry) or investment purposes (e.g., a duplex purchased for rental income). See 1-1: The Rewards of Sound Financial Planning.)

The purchase of a car is an example of:

Make a $12,000 down payment on an automobile in 4 years. (The goal to make a $12,000 down payment on an automobile in 4 years is specific and has a target date. Therefore, it is the most useful in developing a financial plan. See 1-2: The Personal Financial Planning Process.)

Which of the following financial goals is most useful for developing a financial plan?

Establishing an emergency fund with 6 months' worth of income (Short-term planning should also include establishing an emergency fund with at least 6 months' worth of income. This special savings account serves as a safety reserve in case of financial emergencies such as a temporary loss of income. See 1-2: The Personal Financial Planning Process.)

Which of the following practices helps an individual survive in a financial crisis?

Andy's purchasing power will decrease. (The amount of goods and services that each dollar buys at a given time will decrease with an increase in inflation. Therefore, Andy's purchasing power will decrease. See 1-4: The Planning Environment.)

Which of the following statements is true about Andy if the inflation rate is increasing every year by 1 percent and there is no growth in his salary?

A liability (A liability)

_____ is something we owe, which is measured by the amount of debt we incur.

Land (Any immovable property—land and anything fixed to it, such as a house—is classified as real property. See 1-3: From Goals to Plans: A Lifetime of Planning.)

______ would be considered real property.