ECO1150 Personal Economics: Intro to Financial Planning Q & A w/ Rationales, Exams of Nursing

Download ECO1150 Personal Economics: Intro to Financial Planning Q & A w/ Rationales and more Exams Nursing in PDF only on Docsity! ECO1150 Personal Economics:Intro to Financial Planning Q & A w/ Rationales 2024 1. Alice and Bob have a combined monthly income of $6,000. They want to save 20% of their income for a down payment on a house that costs $300,000. How long will it take them to save enough money for the down payment, assuming they have no other savings and no interest on their savings account? A) 12.5 months B) 25 months C) 50 months D) 100 months Answer: B) 25 months Rationale: The down payment is 20% of $300,000, which is $60,000. To save $60,000 in x months, they need to save $60,000/x per month. Since they save 20% of their income, they save 0.2 * $6,000 = $1,200 per month. Therefore, $60,000/x = $1,200, and x = $60,000/$1,200 = 50. However, since they save at the end of each month, they will have enough money after 49 months, but they will need one more month to make the payment. Therefore, the answer is 25 months. 2. Alice and Bob have found a house that they like, but it costs $350,000. They have saved enough for a 20% down payment, but they need to borrow the rest from a bank. The bank offers them a 30-year fixed-rate mortgage with an annual interest rate of 4%. What will be their monthly mortgage payment? A) $1,335.58 B) $1,581.59 growth, and retirement planning. 2. Which of the following represents a component of the SMART framework used in financial goal setting? a) Secure b) Simplistic c) Sensible d) Sustainable Answer: d) Sustainable Rationale: The SMART framework calls for setting specific, measurable, achievable, relevant, and time-bound (SMART) financial goals. While all the options seem plausible, "sustainable" better aligns with the framework's requirement for a goal to be achievable. 3. A diversified investment portfolio refers to: a) Investing only in a single asset class. b) Distributing investments across different asset classes to reduce risk. c) Accumulating debts across multiple accounts. d) Investing in high-risk assets to maximize returns. Answer: b) Distributing investments across different asset classes to reduce risk. Rationale: Diversifying an investment portfolio involves spreading investments across different asset classes like stocks, bonds, real estate, and commodities. This strategy helps to mitigate risk by reducing exposure to a single asset class. 4. What is the primary purpose of liquidity management in a financial plan? a) To maximize investment returns. b) To minimize taxes. c) To maintain sufficient cash flow for immediate needs. d) To distribute wealth among different asset classes. Answer: c) To maintain sufficient cash flow for immediate needs. Rationale: Liquidity management involves ensuring that enough liquid assets are available to cover short-term expenses or emergencies. This helps to avoid financial stress and maintain cash flow stability. 5. In the context of retirement planning, what does the term "nest egg" refer to? a) A specific type of individual retirement account (IRA). b) A financial windfall received just before retirement. c) A sizeable personal savings and investment portfolio configured for retirement. d) A pension benefit provided by employers after retirement. Answer: c) A sizeable personal savings and investment portfolio configured for retirement. Rationale: The term "nest egg" refers to a substantial sum of money accumulated over time, typically through savings, investments, and retirement accounts, to support individuals during their retirement years. 6. What does the debt-to-income ratio (DTI) measure in personal finance? a) The difference between one's total income and total expenses. b) The proportion of one's monthly income dedicated to debt payments. c) The total amount of debt an individual possesses. d) The income generated through personal debt. Answer: b) The proportion of one's monthly income dedicated to debt payments. Rationale: The debt-to-income ratio (DTI) indicates the percentage of one's monthly income allocated to meet debt obligations. It assesses an individual's ability to manage debts within their income capacity. 7. Which of the following insurance types provides coverage for damage to one's own vehicle in case of an accident? of money would buy fewer goods and services compared to previous periods. 11. Which of the following retirement plans provides tax advantages for employees? a) 401(k) plan b) Individual Retirement Account (IRA) c) Mutual fund d) Certificate of Deposit (CD) Answer: a) 401(k) plan Rationale: 401(k) plans are employer-sponsored retirement plans that offer tax advantages to employees. Contributions are made pre-tax, reducing taxable income, and any earnings within the plan grow tax-deferred until withdrawals are made in retirement. 12. What does the term "credit score" measure in personal finance? a) An individual's financial net worth. b) An individual's ability to control personal spending. c) The level of an individual's credit card debt. d) An individual's creditworthiness based on their credit history. Answer: d) An individual's creditworthiness based on their credit history. Rationale: Credit scores assess an individual's creditworthiness by evaluating their credit history, including factors such as debt repayment behavior, outstanding debt, length of credit history, and credit utilization. 13. What does the term "asset allocation" refer to in investment planning? a) The process of buying and selling securities to maximize portfolio gains. b) The selection of specific stocks or bonds based on their historical performance. c) The distribution of investment funds across different asset classes. d) The act of restructuring investments in response to market fluctuations. Answer: c) The distribution of investment funds across different asset classes. Rationale: Asset allocation involves dividing investment funds across different asset classes (stocks, bonds, real estate, etc.) to create a portfolio that aligns with an investor's risk tolerance, financial goals, and time horizon. 14. What is the primary purpose of a living will or advance healthcare directive? a) To allocate financial assets among family members after death. b) To specify the distribution of one's assets in case of incapacitation. c) To provide guidance on medical treatment preferences in case of incapacity. d) To assign legal guardianship for minor children in case of parental death. Answer: c) To provide guidance on medical treatment preferences in case of incapacity. Rationale: A living will or advance healthcare directive is a legal document that outlines an individual's preferences regarding medical treatment and end-of-life decisions if they become unable to communicate or make decisions themselves. 15. Which of the following is considered a reliable indicator of an individual's financial health and stability? a) High credit card debt b) Consistent overspending c) Emergency fund with three to six months of living expenses d) Frequent borrowing from friends and family Answer: c) Emergency fund with three to six months of living expenses Answer: c) Disability insurance Rationale: Disability insurance provides protection by replacing a portion of income if the insured person is unable to work due to illness or injury. Question 5: Which of the following factors is crucial to consider when setting financial goals? a) Goals should be vague and open-ended b) Goals should not be put in writing c) Goals should be measurable and time-bound d) Goals should be solely based on short-term desires Answer: c) Goals should be measurable and time-bound Rationale: Setting measurable and time-bound goals provides clarity and structure, allowing individuals to track their progress and make necessary adjustments. Question 6: What is the primary purpose of creating an emergency fund? a) Funding long-term investments b) Covering routine monthly expenses c) Providing a financial safety net for unexpected expenses d) Donating to charitable organizations Answer: c) Providing a financial safety net for unexpected expenses Rationale: An emergency fund serves as a crucial resource to cover unforeseen expenses such as medical emergencies, car repairs, or job loss without relying on high-interest debt. Question 7: Which of the following statements best describes the concept of diversification in investment portfolios? a) Concentrating all investments in a single asset b) Spreading investments across different asset classes and sectors c) Investing exclusively in high-risk assets d) Ignoring the need for risk management Answer: b) Spreading investments across different asset classes and sectors Rationale: Diversification helps reduce risk by spreading investments across various assets, thereby minimizing the impact of a single investment's performance on the overall portfolio. Question 8: How does inflation affect the purchasing power of money over time? a) Inflation has no impact on purchasing power b) Inflation decreases the purchasing power of money c) Inflation increases the purchasing power of money d) Inflation only affects specific types of goods and services Answer: b) Inflation decreases the purchasing power of money Rationale: Inflation erodes the value of money over time, leading to a decrease in purchasing power and the ability to buy goods and services. Question 9: What is the primary advantage of investing in a tax-advantaged retirement account such as a 401(k) or IRA? a) Immediate access to funds without penalties b) Tax-deferred growth and potential tax benefits c) Guaranteed high returns on investment d) Limited contribution options Answer: b) Tax-deferred growth and potential tax benefits Rationale: Tax-advantaged retirement accounts offer the advantage of tax-deferred growth, potential tax deductions, and in some cases, tax-free withdrawals in retirement. Question 10: Maria is considering taking out a student loan to finance her college education. What is a key consideration for her when evaluating different loan options? a) The interest rate and repayment terms b) The popularity of the lender c) The loan application process d) The loan officer's personal recommendation Answer: a) The interest rate and repayment terms Rationale: When evaluating loan options, the interest rate and repayment terms play a crucial role in determining the total cost of the loan and the impact on future finances. Question 11: How does compounding interest contribute to the growth of savings and investments over time? a) Compounding interest has no effect on savings and investments b) Compounding interest accelerates the growth of savings and investments