Personal Money Management Questions

The average propensity to consume refers to:

• the dollars of income spent on luxury goods

• the dollars of income saved by an individual

• expenditures on the basic necessities of life

• the percentage of income spent for current needs

• the fact that people with higher propensity to consume earn lower income

Answer explanation

The average propensity to consume refers to the percentage of each dollar of income, on average, that a person spends for current needs rather than savings. See 1-1: The Rewards of Sound Financial Planning.

Accumulating wealth for later years is called estate planning

• True

• False

Answer explanation

Estate planning involves planning how to pass personal wealth to heirs in the most effective manner. See 1-3: From Goals to Plans: A Lifetime of Planning.

Short-term planning should include creating and maintaining an emergency fund with at least 6 months’ worth of income

• True

• False

Answer explanation

Short-term planning should include establishing an emergency fund with at least 6 months’ worth of income. See 1-2: The Personal Financial Planning Process.

Stocks, bonds, and mutual funds are _____ assets

• physical

• earning

• fixed

• tangible

• real

Answer explanation

Financial assets are intangible, paper assets such as savings accounts and securities (stocks, bonds, mutual funds, and so forth). They are earning assets that are held for their expected future returns. See 1-1: The Rewards of Sound Financial Planning.

Managing life, health, and disability insurance is an important part of _____ planning

• asset acquisition

• tax

• retirement

• estate

• employee benefit

Answer explanation

Employee benefits include life, health, and disability insurance. Managing employee benefit plans and coordinating them with your other plans are an important part of the overall financial planning process. See 1-3: From Goals to Plans: A Lifetime of Planning.

The last step in the financial planning process is to:

• develop financial plans and strategies to achieve goals

• use financial statements to evaluate results of plans and budgets, taking corrective action as required

• implement financial plans and strategies

• redefine goals and revise plans and strategies as personal circumstances change

• periodically develop and implement budgets to monitor and control progress toward goals

Answer explanation

The last step of financial planning involves redefining goals so that they better meet current needs and revising financial strategies accordingly. See 1-2: The Personal Financial Planning Process.

An economy experiences _____ after a peak

• a convolution

• an expansion

• a contraction

• recovery

• prosperity

Answer explanation

An economy usually experiences a contraction after a peak. During a contraction (also known as a recession), the real gross domestic product (GDP) falls into a trough, which is the end of a contraction and the beginning of an expansion. See 1-4: The Planning Environment.

The consumer price index (CPI) is a measure of:

• unemployment

• inflation

• stagnation

• recession

• saving

Answer explanation

The most common measure of inflation, the consumer price index (CPI), is based on changes in the cost of consumer goods and services. See 1-4: The Planning Environment.

Personal financial planning is important because it:

• controls inflation

• limits consumption

• reduces social disparity

• results in an improved standard of living

• reduces economic differences among individuals

Answer explanation

Personal financial planning is important because it helps define financial goals and develop appropriate strategies to reach them. It also brings rewards that include greater flexibility, an improved standard of living, wise spending habits, and increased wealth. See 1-1: The Rewards of Sound Financial Planning.

Setting long- and short-term career goals helps in career planning

• True

• False

Answer explanation

Like financial planning, career planning is a lifelong process that includes short- and long-term goals. See 1-5: What Determines Your Personal Income?