Everyday Economics Final

How do credit card companies make money?

-Fees (annual fees, over-limit fees, late fees, cash-advance fees) -Interest on revolving credit debt -Commission of the purchase price from merchants (ranges from 1 to 4 percent per purchase) -Sell personal information to others

List factors that contribute to the increasing cost of higher education

-Lack of Government subsidies -Increase in competition among students -Whats the alternative? Increase in demand -Bloated college bureaucracies -For profit colleges

What are the top causes of bankruptcies and how are they related?

-Large medical expenses -Job loss -Too much debt (credit card, student loan) -Divorce (tax rate of 50%) -Unexpected losses (coupled with lack of insurance) All these causes cannot be anticipated.

What are the three rules of investing?

1. Diversify: -You need exposure to a broad set of different stocks and bonds -Index funds will provide this exposure -This minimizes your overall risk (all your eggs are not in one basket) -If your company pays you in stock, SELL IT and diversify 2. Invest in passive index funds or exchange traded funds, NOT actively managed funds. 3. Dollar cost average: -Buy the same dollar amount ($400/month) each month regardless of the price of the stocks/bonds. -This automatically has buying more stock when prices are lower -NO ONE knows what the market will do tomorrow or next month, but I'd bet my house it will be higher in 10 years -Do not panic! Think about all those that pulled out of the market during the 2008 financial crisis -You are investing for the long run, not even year to year

What is Indiana's state income tax?

3.3%

What is a 401(k) / 403(b)?

401(k) is a tax-qualified, defined-contribution pension account defined in subsection 401(k) of IRS code. 403(b) is roughly a 401(k) for non-profit organizations (Public schools, colleges, universities, charities, state governments, local governments and other tax-exempt entities). Similar contribution limits with catch-ups if older than 50.vesting period is typically shorter for 403(b). Investing options are typically more restricted for 403(b)

How many people live in poverty in the U.S.?

43.1 million people live in poverty in the U.S.

What are the main characteristics of a Ponzi scheme?

A Ponzi scheme, simply put, is a business model that promises to pay out more money than it takes in. New investors are generally promised a relatively very high return on their investment. The returns, though, are dependent upon the operator/debtor being able to find new sources of income perpetually.

Fixed vs. Variable Interest Rates

A fixed interest rate loan is a loan that doesn't fluctuate during the fixed rate period of the loan, this allows the borrower to accurately predict their future payments. Variable interest rate is an interest rate that fluctuates over time

Escrow

A legal concept in which a financial instrument or an asset is working on behalf of two other parties that are in the process of completing a transaction

Loan consolidation

A loan made to consolidate several debts into one loan, usually for the purpose of reducing the monthly payments by extending them over a longer time period.

What is a market index?

A measurement of the value of a section of the stock market. It is computed from the prices of selected stocks (typically a weighted average). It is a tool used by investors and financial managers to describe the market, and to compare the return on specific investments.

What is civil forfeiture?

A mechanism by which the state and federal government can seize people's property without having to convict them of a crime.

Sallie Mae

A publicly traded company that is the largest provider of student loans in the United States. Along with providing student loans, Sallie Mae purchases student loans from original lenders and provides financing to state-based student loan agencies

Housing Ratio

A ratio comparing housing expenses to before-tax income that is used by lenders to qualify borrowers for a mortgage. The housing expense measure includes mortgage principal, interest payments, property taxes, hazard insurance, mortgage insurance and association fees

Nominal vs Real return calculations

A real rate of return is the annual percentage return realized on an investment, which is adjusted for changes in prices due to inflation A nominal rate of return is the amount of money generated by an investment before factoring in expenses such as taxes, investment fees, and inflation.

Brunner Test

A test that shows whether or not, based on the current income and expenses, a "minimal" standard of living for the debtor and the debtor's dependents if forced to pay off student loans.

Secured vs. Unsecured credit

A type of credit card that is backed by a savings account used as collateral on the credit available with the card. Unsecured credit is not collateralized by an asset, is a common form of credit used for business

What is a W4?

A w4 form is used by your employer to withhold the proper amount of federal income tax from your paycheck. It is required upon hiring

Difference between APR to APY

APR = Annual Percentage Rate is the annual rate charged for borrowing or earned through an investment This is the stated annual interest rate. It does not take into account compounding of interest. APY = Annual Percentage Yield is the effective annual rate of return taking into account the effect of compounding interest. This number takes into account the compounding of interest.

Know the difference between active and passive managed mutual funds.

Actively managed funds (sometimes called mutual funds) have a team of investors picking stocks and bonds for the fund to hold Passively managed funds (index funds, exchange traded funds) do not have human beings picking stocks, but passively follow an index. Because you do not have to pay for a management team, passively managed funds are much, much cheaper to own.

How do insurance companies make money?

Actuaries assign probabilities to certain event. The more individuals the insurance companies covers, the more accurate their predictions. Accurate predictions means that the insurance company can make money underwriting insurance; that is, revenue exceeds costs.

Adverse selection and moral hazard as it relates to health insurance.

Adverse selection refers to a situation where sellers have information that buyers do not, or vice versa, about some aspect of product quality. Moral hazard occurs when party in a transaction has incentive to assume additional risks that benefit them but negatively impact the other party. Moral Hazard and adverse selection occur in health care when someone purchases additional health care when they become insured. Economists regard these additional health care purchases as inefficient because they represent care that is worth less to consumers than it costs to produce.

Besides federal, state and local income, what other taxes are taken out of income?

Along with federal income taxes, other federal taxes are taken from your paycheck: -Social Security Tax -Medicare / Medicaid

Total student loan debt as a percentage of U.S. GDP

Americans owe over $1.45 trillion in student loan debt which is about 8% of the U.S. GDP

Emergency fund

An account used to set aside funds needed in the event of a personal financial dilemma

ARM

An adjustable-rate mortgage is a type of mortgage in which the interest rate applied on the outstanding balance varies throughout the life of the loan

How does a bank's appraisal play a role in the lending process?

An appraisal is a comprehensive report that determines the value of your property based on a number of valuation factors, ranging from gross living space to the year the property was built.

Cosignment

An arrangement in which goods are left in the possession of another party to sell.

Transaction costs

Are expenses incurred when buying or selling a good or service. Transaction costs include brokers' commissions and spreads which are the differences between the price the dealer paid for a security and the price the buyer pays

Principal-Agent Problem

Arises when one party or entity works on behalf of another in return for some incentives. This then leads to a moral hazard or conflicts of interest

Why are bond prices and interest rates inversely related?

As interest rates go up, the price of bonds goes down. Example: In 2017, the state of Indiana issues a 10-year bond with 5% annual interest rate. One year later, inflation has increased 10% and in 2018, the state of Indiana issues 10-year bonds with 10% annual interest rate.

What has happened to birth and death rates in developed countries?

Birth rates in advanced economies have fallen tremendously Death rates have fallen as a result of greater access to modern medicine and health care in developed countries.

What is a bond? Read bond quote from WSJ.

Bonds are debt. They are an IOU of sorts in that they are a legal obligation to repay principal typically with interest at a specific date

Suppose you invest $400 per month beginning at age 20. How much will you have at 70 if you earn a 7% return. What is the total amount contributed? What if you started saving at age 35?What if you get a 3% return? What if your tax rate is 30%?

By 70

Know the difference between defined benefit and defined contribution retirement plans.

Defined Benefit (DB) = workers get a percentage of their pay after retirement until death. (Sometimes can be transferred to spouse) In contrast, instead of guaranteeing salary in retirement, company will contribute certain amount to retirement fund (e.g., 401-k plan).

Fisher equation of interest rates

Estimates the relationship between nominal and real interest rates under inflation. In economics this equation is used to predict nominal and real interest rate behavior.

How are federal taxes paid?

Federal income taxes are NOT paid annually but collected throughout the year. Employers withhold income tax each pay period and pay the IRS (sometimes multiple times per week) based upon their employees anticipated tax liability for the year.

Differences between Federal and Private Student Loans

Federal student loans include many benefits such as fixed interest rates and income-driven repayment plans not typically offered with private loans. In contrast, private loans are typically more expensive than federal student loans.

Why will increasing the minimum wage not help alleviate the poverty problem?

Firstly, a blanket increase in minimum wage across the country will disproportionately hurt those living in more expensive areas because cost of living is different everywhere. Secondly, many working age people are not even in the workforce. Thirdly, Increasing minimum wage may push people off of welfare and other benefits, making them worse off.

What is the basic difference between the HDHP Plan and the PPO $900 Deductible plan.

HDHP = High deductible, health plan. In HDHP's monthly premiums increase with spouse, family coverage and salary;decrease if you sign a pledge not to use tobacco products. PPO = Preferred Provider Organization. In the PPO $900 deductible plan monthly premiums are $149. They provide better coverage and deductible = $900 for employee and $2,700 for family in- and out-of-network

Thomas Malthus argued that...?

He observed that increase in food production (or wealth) led to an increase in population. Humankind had a propensity to use increases in per capita production levels to increase population as opposed to increase their standard of living.

Peer Effects

How students influence his or her classmates not only through spillovers and how teachers respond to him/her, but also in how he/she affects classroom (university) standards

What is the difference between a Roth IRA and Traditional IRA?

IRA's (individual retirement accounts) are retirement plans that do not require an employer program. In a Roth IRA, contributions are made with income that is taxed. Because contributions are taxed, you can always withdraw the amount that you put in without tax implications. Roth IRA acts like a savings account where the interest and return on investment grows tax free. Can contribute to Roth IRA even if you have other retirement accounts. A Traditional IRA reduces your taxable income. Contributions are made with pre-tax dollars which makes Traditional IRAs not as flexible as Roth IRAs. It does NOT act like a savings account. You typically cannot withdraw contributions penalty free. Contributions do NOT grow tax-deferred. Taxes are paid when distributions are taken. May not be able to contribute to Traditional IRA if you have other retirement accounts.

1040 Form: What is Adjusted Gross Income?

IRS tax form 1040 allows taxpayers to claim numerous expenses and tax credits, itemize, deductions, and adjust income. Adjusted gross income is an individual's total gross income minus specific deductions.

What is statistical discrimination and how does it apply to online dating?

In absence of complete information, decision makers will use a statistical average of a group in order to to assess an individual. Online dating profiles provide partial information. Some form of statistical discrimination.

How much should insurance cost?

In general, insurance should cost the probability of the insured event occurring times the cost of indemnifying the insured.

Graphically show how an increase in the minimum wage could lead to unemployment. What factors are important for determining the extent of unemployment?

Increasing minimum wage increases unemployment because of the elasticity of demand. Why would a company pay more to hire a worker to do a job that a machine could do for a lot cheaper.

Inflation, deflation, disinflation

Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling. Deflation is a decrease in the general price level of goods and services. Disinflation a decrease in the rate of inflation - a slowdown in the rate of increase of the general price level of goods and services in a nation's gross domestic product over time.

What is the purpose of insurance?

Insurance is a hedge against large financial loss associated with a particular event. It is not meant to cover everyday expenses but large losses that are rare, unpredictable events.

Compound Interest

Interest calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan. Compound Interest can be thought of as interest on interest and will make a sum grow at a faster rate then simple interest Compound interest is calculated by multiplying the principal amount by one plus the annual interest rate raised to the number of compound periods minus one P [(1 + i)n - 1]

Over the last 60 years, what has happened to the share of corporate income tax, as a percentage of federal revenue?

It has decreased

Explain the rise and subsequent fall in the Labor Force Participation Rate.

Labor force participation rate = number of working age people who are employed or unemployed/ total working-age population. The rise in the labor force participation rate is a result of the women entering the workforce in the mid 1960s The subsequent fall came in the 2000s when a lot of working age men and women left the workforce

What is the difference between marginal and effective / average tax rate?

Marginal tax rates are the rate of tax that applies to the last dollar of our income. For example, if you're married and filing jointly and your taxable income is $100,000 you're said to be in the 25% marginal tax bracket because your last dollar of income is subject to tax at a rate of 25%. Effective tax rates are the average rate of taxation that applies to our income. If you earned $100,000 in income and paid $18,000 in federal income taxes, your effective rate would be 18%

What is a policy proposal that might alleviate poverty? Be specific and cite your sources.

Nobel Laureate James Heckman proposed that investing in early childhood education could have huge returns in alleviating poverty. A Jamaican study revealed that a high-quality early childhood education boosted the earnings of disadvantaged children in Jamaica by 25% over their lifetime.

Nominal vs Real

Nominal values of something are its money values in different years. Real values adjust for differences in the price level in those years

Normative vs. Positive economics.

Normative economics=a branch of economics that expresses value or judgement about economic fairness or what the outcome of the economy or goals of the economy or goals of public policy ought to be. Positive Economics = is the branch of economics that concerns the description and explanation of economic phenomena. It focuses on facts and cause-and-effect behavioral relationships and includes the development and testing of economics theories.

How many children live in poverty in the U.S.? In Indiana?

One in five children under 18 in the U.S. live in poverty. 20.5% of Indiana children live in poverty.

What is a patent troll?

Patent trolls are law firms that purchase generic patents and then sue individuals and small businesses for violating the patent. Patent trolls kill innovation and costs trillions of dollars a year

How to calculate a FICO Score?

Payment History (35%) Accounts owed (30%) Length of credit history (15%) Credit mix (10%) New credit (10%)

Inflation and purchasing power calculations

Purchasing power is the value of a currency expressed in terms of the amount of goods or services that one unit can buy. Inflation is the rate at which the general level of prices and goods is rising and, consequently, the purchasing power is of currency is falling.

Adverse Selection

Refers to a situation where sellers have information that the buyers do not, or vice versa, about some aspect of product quality.

What is the difference between standard deduction and itemized deductions?

Standard deduction is a fixed dollar amount, based on your filling status and age, that the IRS lets you take off your taxable income Itemized deduction allows you to list your deductions on a schedule. Roughly one third of taxpayers itemize.

Bennett Hypothesis

Student aid has allegedly given colleges and universities "license" to increase tuition, meaning that federal student aid has not made higher education more accessible or more affordable

Understand the two-part structure of the Federal Reserve System.

The Fed is the central bank of the United States. It is in charge of monetary policy which affect interest rates, the amount of credit, and the money supply. The Fed is a two-part structure that consists of a central authority: Board of governors in DC and a decentralized network of 12 federal reserve banks.

Does the Federal Reserve set an interest rate?

The Federal reserve does not set specific interest rates.

Why is the NCCA a semi-effective cartel?

The NCAA is a semi-effective cartel because it has monopsony power. It can drive down price of labor, restrict player movement, it cooperates with the NFL to maintain the amateur status, and it has a punishment mechanism for cheaters

What is a "small business"?

The Small Business Administration (SBA) defines all businesses with fewer than 500 employees as"small," which is 99.7% of all firms in US.

Price discrimination as it applies to higher education

The action of selling the same product at different prices to different buyers, in order to maximize sales and profits. In-state vs. out of state tuition is an example of this applies to higher education

What is a stock? Read stock price quote from WSJ.

The capital raised by a business or corporation through the issue and subscription of shares

CPI vs. PPI

The consumer price index (CPI) is a measure of inflation that is based on a basket of goods purchased by consumers. The Producer Price Index (PPI) is a weighted index of prices measured at the wholesale, or producer level

Opportunity cost

The loss of potential gain from other alternatives when one alternative is chosen

Market for lemons

The quality of goods traded in a market can degrade in the presence of information asymmetry between buyers and sellers, leaving only lemons behind

Inflation Risk

The risk that inflation will undermine the performance of your investment

What is the current value of a dollar to you and why?

The value of a dollar to me is exponentially greater than it is to someone who is older because I have longer to compound interest

What has happened to the incarceration rates in the U.S. over the last 40 years?

They have increased tremendously due to strict laws on drugs.

What is the purpose of Warren Buffet's Joys of Compounding segments?

To educate people on the extraordinary benefits of compounding interest.

True or False: Interest on student loan is tax deductible.

True

True or False: Student loans cannot be discharged during bankruptcy.

You can only discharge your student loans in bankruptcy if you can prove undue hardship.

What type of firm creates jobs in the US?

Young Firms whether big or small are primary job creators

What is a health savings account?

a tax-advantaged medical savings account you can contribute to and draw money from for certain medical expenses tax-free

Understand insurance terms: copay, deductible, premium.

copay = a fixed amount you pay for covered services, paid when you get the service deductible =A specific dollar amount that your health insurance company may require that you pay out-of-pocket each year before your health insurance plan begins to make payments for claims. the amount of money that an individual or business must pay for an insurance policy.

What is the largest retirement expense?

end-of-life care is the most expensive retirement expense