Chapter 01: Understand Personal Finance

Chapter 01: Understand Personal Finance

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Indicate whether the statement is true or false.

• Financial literacy is knowledge of facts, concepts, principles, and technological tools that are fundamental to being

smart about money.

• True
• False

• Being financially responsible is being knowledgeable about facts, concepts, principles, and technological tools that are

fundamental to being smart about money.

• True
• False

• Personal finance involves how people spend, save, protect, and invest their financial resources.
• True
• False

• Financial success is defined as having high wealth.
• True
• False

• Financial security is defined as having a high income.
• True
• False

• People who save and invest are much more likely to have funds for future consumption.
• True
• False

• Standard of living refers to an individual's level of spending and consumption.
• True
• False

• Standard of living is what individuals or groups aspire to attain, and level of living is the level of wealth, comfort,

materials goods, and necessities one is currently living with.

• True
• False

• Financial security or wealth requires you to spend less than you earn.
• True
• False

• A business cycle is a wavelike pattern of economic activity that includes an expansion, peak, contraction, and trough.
• True
• False

• The expansion phase is the preferred stage of the economic cycle.

(Personal Finance, 14e Thomas Garman, Jonathan Fox) (Test Bank, Answer at the end of each Chapter) 1 / 4

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Class:

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Chapter 01: Understand Personal Finance

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• True
• False

• Since it is impossible to make precise forecasts about economic trends, we can ignore inflation and interest rates when

planning our finances.

• True
• False

• The typical U.S. recession is marked by an average economic decline of 2 percent.
• True
• False

• The gross domestic product broadly measures the nation’s economic health.
• True
• False

• Procyclical economic indicators move in the same direction as the economy.
• True
• False

• The index of leading economic indicators is a composite index reported monthly that suggests the future direction of

the U.S. economy.

• True
• False

• The index of leading economic indicators averages eight components of growth from various segments of the

economy.

• True
• False

• Leading economic indicators are relied upon to measure the state of the economy at any point in time.
• True
• False

• An example of inflation is an increase in the price of coffee, gasoline, or other commodities.
• True
• False

• A steady rise in the general level of prices is called inflation.
• True
• False

• Deflation is a period of declining prices.
• True
• False

• / 4

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• Deflation occurs in an economy when there is an expansion in the money supply.
• True
• False

• The amount of goods and services that one's income will buy is called purchasing power.
• True
• False

• Retirees or others on fixed incomes suffer during times of moderate to high inflation.
• True
• False

• NOMINAL INCOME is adjusted for inflation and thus reflects the actual purchasing power of one's income.
• True
• False

• In times of high inflation, personal incomes generally keep up with the inflation rate.
• True
• False

• The consumer price index is a broad measure of price changes in all goods and services purchased for consumption by

urban households.

• True
• False

• When prices rise, the dollar's purchasing power declines by the same percentage.
• True
• False

• The term interest refers to the price of money.
• True
• False

• Interest rates on home mortgages and other loans tend to fall during high inflation.
• True
• False

• All things considered, a saver who earns 4 percent interest on a savings account when the rate of inflation is 4 percent

is losing real purchasing power.

• True
• False

• Smart investors recognize that inflation risk is higher for long-term lending than for short-term lending.
• True
• False

• / 4

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• When forecasting long-term inflation rates for financial planning purposes, it is better to err on the low side rather than

on the high side.

• True
• False

• Interest rates earned on short-term investments are generally lower than those earned on longer-term investments.
• True
• False

• The rate of interest and the inflation rate generally move in the same directions; when one goes up, the other also goes

up.

• True
• False

• When one forgoes buying a new TV because they spend the money on college books, the TV is the opportunity cost of

buying the books.

• True
• False

• By considering opportunity costs, we can optimize our financial decisions.
• True
• False

• The opportunity cost of a decision is the value of the next best alternative that must be foregone and addresses the

personal consequences of choices.

• True
• False

• Marginal cost is the additional cost of one more unit of something.
• True
• False

• According to economic theory, people will seek additional utility if marginal utility exceeds marginal cost.
• True
• False

• Most financially successful taxpayers must pay federal income taxes at the 22 percent marginal tax rate.
• True
• False

• Financially successful people often pay U.S. federal income taxes at the 22 percent, or higher, marginal tax rate.
• True
• False

• One's average federal income tax rate is generally equal to one's marginal tax rate.
• True
• / 4