FINANCIAL LITERACY EXAM 1 (50 Questions) With Explanations

Businesses usually are unable to enter into legally binding contracts with

• minors.

• senior citizens.

• foreigners.

• tourists.

Answer explanation

Businesses usually are prevented from entering into legally binding contracts with certain groups of people because these people are not considered to have the capacity to understand the consequences of their actions.

What type of information do truth in lending laws typically require lenders to provide to loan applicants?

• The lender’s current liabilities

• Scoring system used to evaluate credit

• Copy of their credit report

• Annual percentage rate charged

Answer explanation

Truth in lending laws typically require lenders to reveal the true cost of a loan by providing information about interest rates and total repayment amounts.

In many countries, there are laws in place to protect consumers from unfair credit practices such as

• adhering to standardized procedures that are transparent and understandable.

• banning debt collectors from threatening consumers that owe money.

• discriminating against certain demographics when reviewing applications for credit.

• providing the terms and conditions of credit agreements in clear language.

Answer explanation

Many countries have consumer credit protection laws in place to prevent debtors from being treated unfairly by creditors. For example, in the United States, the Equal Credit Opportunity Act requires banks and credit card companies to make credit equally available to all credit-worthy applicants regardless of race, color, religion, national origin, sex, marital status, or age. Banning debt collectors from threatening consumers that owe money, adhering to standardized procedures, and providing clear terms and conditions are all examples of fair credit practices—not unfair practices.

One of the aims of regulating the insurance industry is to

• make coverage more exclusive.

• raise insurance prices.

• create challenges for insurance agents.

• reduce the risk of gaps in coverage.

Answer explanation

Governments regulate the insurance industry to make sure that insurance companies do not have major gaps in coverage. When there are gaps in coverage, consumers are at much greater financial risk.

A classic investment scam that uses contributions from new investors to simulate high returns to current investors is called

• a pyramid scheme.

• affinity fraud.

• phishing.

• pump and dump.

Answer explanation

A pyramid scheme, also called a Ponzi scheme, relies on cash from new investors to pay returns to current investors. Affinity fraud is when someone fraudulently claims to be a member of the same ethnic, religious, career, or community group in order to gain a potential investor's trust. Phishing is spam email that encourages people to reveal banking, brokerage, and other personal information that is then used to access accounts. Pump and dump refers to the practice of buying a stock when the price is low, "pumping" up the price by giving the company positive press, and then selling the stock at a profit.

Regulatory agencies in the security and investment industry aim to keep markets fair by

• banning illegal insider trading.

• requiring corporate taxes.

• preventing hiring discrimination.

• prohibiting misleading advertisements.

Answer explanation

Illegal insider trading occurs when a person sells or buys a security because of knowledge that is not public. This activity is illegal because it would be unfair for certain people to base decisions on knowledge that the general public does not have. By banning this practice, the market is fairer. Corporate taxes, hiring discrimination, and misleading advertisements are not related to the securities and investments industry.

When providing services to clients, financial professionals have the responsibility to supply

• accurate information.

• payment options.

• credit counseling.

• bank statements.

Answer explanation

Financial professionals often invest money for clients. As a result, they should provide clients with accurate information about the performance of possible investments. Some investments are more secure than others. Those clients who do not want to take risks should know which investment options are the safest.

Which of the following statements about economic resources is true:

• Economic resources are the outputs of production.

• All natural resources can be replaced.

• Economic resources are considered consumer goods.

• All economic resources are limited.

Answer explanation

Economic resources are items that can be used to produce goods and services, and they are in limited supply. The categories of economic resources are natural resources, human resources, and capital goods.

Economics is concerned primarily with evaluating alternatives and

• producing goods and services.

• financing the national debt.

• increasing foreign trade.

• making economic decisions.

Answer explanation

Economics is the process of deciding how to obtain the greatest satisfaction with limited incomes, land, property, and natural resources.

What usually decreases as the rate of inflation increases?

• Purchasing power

• Interest rates

• Export quotas

• Money supply

Answer explanation

Purchasing power is a consumer's ability to purchase goods and services. The rate of inflation, the percentage of change in price levels, has a major effect on purchasing power because when inflation is high, a dollar will not buy as much.