Economics
Part 4: Twelve Key Elements of Practical Personal Finance
Practice Test
· Your comparative advantage in a specific area is determined by
· the market value of the skill relative to your opportunity cost of supplying it.
· the absolute value of the skill in the performance of a specific job.
· minimum wage laws, health and safety standards and marginal tax rates.
· the comparative positions of the wealthy, the middle income individuals and low income individuals.
· Financial insecurity in America is primarily the result of
· the low incomes of Americans.
· the huge amount of time and complex knowledge required for basic financial planning.
· a low rate of personal saving and poor financial planning.
· a shortage of financial planners and portfolio managers.
· Economic analysis indicates that
· single-minded pursuit of money and wealth is the key to happiness.
· wealthy people are happier than those with lots of friends, satisfying marriages, and strong religious convictions.
· the desire for more wealth is limited to those who are interested only in their personal welfare.
· no matter what our objectives in life, they are easier to achieve if we have more wealth.
· Compared to high school graduates, those who drop out are
· more valuable to employers.
· more likely to be highly productive.
· more likely to earn high incomes.
· more likely to be poor.
· Which of the following is true?
· Most entrepreneurs work very few hours.
· Entrepreneurs generally save less of their income than other Americans.
· Additional years of schooling will substantially increase your earnings even if they fail to increase your productivity and ability to provide others with things that they value.
· If you want to make a lot of money, you had better figure out how to provide others with substantial value and find ways to discover and act on valuable opportunities.
· A monthly budget can help you achieve financial security by
· helping you choose stocks that are most likely to increase in price.
· reducing the likelihood that you will face unexpected expenditures for maintenance and repairs.
· expanding the borrowing limits on your existing credit cards and increasing the number of credit cards you hold.
· increasing your financial awareness and helping you allocate your funds more effectively.
· Which of the following is the best example of an item that a “real world” savings account is designed to cover?
· the monthly payment for the lease of your apartment
· the purchase of the gasoline you use driving back and forth to work
· an unexpected expenditure to repair the transmission of your car
· funds you are setting aside for your retirement years
· The use of debt financing to purchase food, clothing, vacations, and other non-durable items
· is prudent as long as you plan to save more in the future.
· is imprudent unless you need to purchase these items to impress your friends.
· is prudent as long as you have an unused balance on your credit card.
· is imprudent because such purchases will mean that you will soon be making payments on items that have no value.
· If you are using a credit card prudently, you should
· make only the minimum payment each month.
· pay the balance in full each month.
· pay only the interest on any outstanding balance.
· gradually expand the amount borrowed to the card’s credit limit.
· Traditional IRAs, 401k plans, and other tax-deferred saving plans will
· reduce your current tax liability because funds paid into these plans are tax deductible.
· make it more difficult for a young person to save and accumulate wealth.
· increase your tax liability now, but you will pay lower taxes when you withdraw the funds.
· help those with the lowest incomes, but will be of little value to those with higher incomes who want to save for retirement.
· Which of the following is an advantage of an indexed equity mutual fund relative to a managed equity fund?
· Indexed funds generally have better stock pickers.
· Indexed funds engage in more detailed research.
· Indexed funds have lower operating costs because they engage in less stock trading.
· The compensation of those directing indexed funds is generally higher than those directing managed funds.
· The random walk theory indicates that
· investors can make money by purchasing stocks that are widely expected to earn substantial profits in the future.
· while changes in the prices of specific stocks are difficult to predict, experts are able to forecast the future direction of broad stock market indexes with a high degree of accuracy.
· changes in stock prices are driven by surprise occurrences that are difficult to predict.
· managed mutual funds will persistently out-perform indexed funds.
· The variation in the rate of return one can expect from ownership of stocks will generally be smaller
· if all of the funds are invested in a specific sector of the economy such as health care.
· if a diverse set of stocks is held over a lengthy period of time, such as 30 or 40 years.
· if all of the funds are invested in a single stock.
· if the funds are invested for a relatively short period of time.
· Buying shares of corporate stock tends to be risky when
· the stock of a single corporation is purchased.
· the stock may have to be sold within a few months.
· all stocks bought are in the same industry.
· all of the above are true.
· If an investor’s primary stock holding is currently Exxon Mobil, the purchase of which of the following stocks would provide the investor with the largest reduction in risk?
· Chevron
· Shell Oil Corporation
· Wal-Mart
· Texaco