Chapter 1: Personal Finance Basic and the Time Value of Money

Which of the following goals would be the easiest to implement and measure its accomplishment?

"Save $50 a month to create a $2,000 emergency fund."

Which type of computation would a person use to determine the current value of a desired amount in the future?

Present value of a single amount

Which of the following is an example of opportunity cost?

Saving money instead of taking a vacation.

Inflation reduces the buying power of the dollar.

True

Reduced spending causes unemployment from staff reduction.

True

Trade balance is defined as the difference between a country's exports and its imports.

True

Higher interest rates can be caused by:

a lower money supply

The main goal of personal financial planning is managing your money to:

achieve personal economic satisfaction

The amount of interest is determined by multiplying the amount in savings by the:

annual interest rate and time period

The problem of bankruptcy is associated with misuse of credit in the ______________ component of financial planning.

borrowing

Future value calculations involve:

compounding

The first step of the financial planning process is to:

determine your current financial situation.

The study of how wealth is created and distributed is:

economics

Inflation is likely to result from:

increased demand by consumers without increased supply.

The time value of money refers to:

increases in an amount of money as a result of interest earned

Natalie Smith's new job is very demanding. She regularly works long hours and on the weekends. As a result, Natalie has not had much time for her family and friends. This is an example of:

personal opportunity cost

The financial planning process concludes with efforts to:

review and revise your financial plan

The uncertainty associated with every decision is referred to as:

risk

When an individual makes a purchase without considering the financial consequences of that purchase, he/she ignores the ______________ aspect of financial planning.

spending

The Fed refers to:

the Federal Reserve System

The annual price increase for most goods and services measured by the Bureau of Labor Statistics is called ________.

the consumer price index

Opportunity cost refers to:

what a person gives up by making a choice

Benjamin Smith has just moved into a new house and needs a lawn mower since he has always lived in apartments and now he has a lawn to mow. What type of goal would this be for Benjamin?

Durable-product goal

Economics is the study of using money to achieve financial goals.

False

If you desire your savings to double in 6 years, what rate of return would you need to earn? (Use the Rule of 72.)

12.00 percent

If inflation is increasing at 4 percent per year, and your salary increases at the same rate, how long will it take your salary to double?

18 years [Rule of 72: 72/4 = 18]

When prices are increasing at a rate of 12 percent, the cost of products would double in about how many years?

6 years

With an inflation rate of 8 percent, prices would double in about ___________ years.

9 [Rule of 72, 72/8 = 9]

A family spends $40,000 on living expenses. With an annual inflation rate of 3 percent, they can expect to spend approximately _______ in one year. Use Exhibit 1-A. (Round time value factors to 3 decimal places and final answer to the nearest dollar amount.)

$41,200

A family spends $42,000 on living expenses. With an annual inflation rate of 5 percent, they can expect to spend approximately _______ in one year. Use Exhibit 1-A. (Round time value factors to 3 decimal places and final answer to the nearest dollar amount.)

$44,100

The future value of $1,300 deposited each year for 6 years earning 7 percent would be approximately: Use Exhibit 1-B. (Round time value factors to 3 decimal places and final answer to the nearest dollar amount.)

$9,299

If a person deposited $75 a month for 5 years earning 7 percent, this would involve what type of computation?

Future value of a series of deposits

If you put $500 in a savings account and make no further deposits, what type of calculation would provide you with the value of the account in 10 years?

Future value of a single amount

Which of the following would cause consumer prices to drop?

Increased supply by business without increased consumer demand

____________ risk refers to the danger of changes in buying power during times of rising or falling prices.

Inflation

____________ goals relate to personal relationships, health, and education.

Intangible-purchase

Which of the following is usually considered a long-term financial strategy?

Investing in a mutual fund for six years to accumulate retirement funds

Attempts to increase financial resources are part of the ____________ component of financial planning.

obtaining

If inflation is increasing at 7.2 percent per year, and your salary increases at the same rate, how long will it take your salary to double? (Round up your answer to the next whole number.)

10 years

If you desire your savings to double in 6 years, what rate of return would you need to earn?

12 [Rule of 72, 72/x = 6, 6X = 72, 72/6 = 12]

When prices are increasing at a rate of 12 percent, the cost of products would double in about how many years?

6 years (72/12)

The advantages of personal financial planning include:

All of these

Personal financial activities involve the following main decision areas:

All of these (Sharing, Savings, Spending)

Resources for financial planning can be found from:

All of these (digital media, print media, financial institutions, financial specialists)

Stella Jones likes to go to the movies once a week. When she is at the movies, she generally gets a large popcorn and a drink. Stella wants to be sure that she sets aside money each week so she can continue going to the movies. What type of goal would this be for Stella?

Consumable-product goal

Gross Domestic Product (GDP) measures the total value of goods and services produced within a country's borders, excluding items produced with foreign resources.

False

Increased demand for a product or service will usually result in lower prices for the item.

False

Lenders benefit more than borrowers in times of high inflation.

False

Planning to buy a car is an example of an intangible-purchase goal.

False

The stages in the family and financial needs of an adult are called the:

adult life cycle.

A formalized report that summarizes your current financial situation, analyzes your financial needs, and recommends future financial activities is a(n):

financial plan

Increased consumer spending will usually cause:

higher employment levels

The changing cost of money when borrowing is referred to as ____________ risk.

interest rate

The ability to readily convert financial resources into cash without loss of value is referred to as:

liquidity

Some savings and investment choices have the potential for higher earnings. However, these may also be difficult to convert to cash when you need the funds. This problem refers to:

liquidity risk

As Olivia Wilson plans to set aside funds for her young children's college education, she is setting a(n) ____________ goal.

long-term

The main responsibility of The Fed is to:

maintain an adequate supply of money

The success of a financial plan will be determined by:

the individual's financial habits