WorksheetsFinancial Literacy Exam 1 Practice Question Set
Total questions: 50
Worksheet time: 25mins
Financial planning is best described as:
Preparing tax returns only
A lifelong process of managing money to meet goals
Avoiding all forms of debt
Maximizing income regardless of risk
Which of the following is a step in the financial planning process?
Ignoring changes in your income
Establishing financial goals
Spending without tracking
Assuming constant inflation
Which of the following is an example of unearned income?
Salary
Wages
Dividends
Overtime pay
Inflation is best defined as:
A decrease in the price level
An increase in the general level of prices over time
An increase in wages
A decrease in taxes
If inflation is higher than expected, who benefits most?
Lenders
Borrowers
Retirees on fixed pensions
Savers
If your income rises 4% and inflation rises 2%, your real income:
Decreases by 2%
Increases by 2%
Stays the same
Cannot be determined
Which of the following reduces the purchasing power of money?
Interest
Inflation
Savings
Dividends
Which is NOT a component of financial planning?
Managing credit
Setting savings goals
Avoiding all expenditures
Creating a budget
Which type of goal is 'paying off a student loan within 5 years'?
Short-term goal
Intermediate goal
Long-term goal
Lifetime goal
An increase in nominal income with no change in real income occurs when:
Inflation is zero
Inflation rate equals income growth rate
Inflation is negative
Real wages increase faster than inflation
Which of the following is an asset?
Car loan balance
Checking account
Credit card debt
Mortgage owed
Which of the following is a liability?
Retirement account balance
Home loan balance
Car
Savings bond
Liquidity is important because:
It determines net worth
It measures ability to meet short-term obligations
It increases equity
It decreases risk
Which of the following is most liquid?
A house
A car
A savings account
Jewelry
Net worth is calculated as:
Assets – Liabilities
Income – Expenses
Income – Taxes
Assets + Liabilities
Insolvency occurs when:
Assets > Liabilities
Liabilities > Assets
Expenses < Income
Savings > Debt
Equity in a car is:
The loan balance
The purchase price
The current value minus loan owed
The insurance coverage amount
Fixed expenses include:
Rent
Groceries
Gasoline
Electricity
Variable expenses include:
Rent
Car loan payment
Entertainment
Insurance premium
A debt ratio of 0.5 means:
Debt equals half of assets
Debt equals half of income
Debt equals half of expenses
Debt equals half of liabilities
The time value of money means:
Money today is worth more than the same amount in the future
Money loses value only during inflation
Money today is worth less than in the future
Money is unaffected by interest rates
Simple interest is calculated on:
Principal only
Principal and interest
Future value
Inflation rate
Compound interest grows faster than simple interest because:
It includes inflation
It earns interest on both principal and accumulated interest
It lowers risk
It is tax-free
Future value depends on:
Present value, interest rate, and time
Assets and liabilities
Income and expenses
Taxes and deductions
Present value is:
The current worth of a future sum of money
Always equal to future value
Equal to net worth
The same as asset value
Which will result in the highest future value?
Lower interest rate
Shorter time period
Higher compounding frequency
No reinvestment of interest
Rule of 72 estimates:
Years required to double money at a given interest rate
Tax owed on capital gains
Maximum savings rate
Annual expenses
If $500 is invested at 10% for 2 years compounded annually, FV is:
$550
$600
$605
$620
Annual interest rate of 12% compounded monthly has an effective rate:
Equal to 12%
Less than 12%
Greater than 12%
Cannot be determined
Doubling money in 9 years implies an approximate interest rate of:
6%
7%
8%
9%
Marginal tax rate applies to:
Your entire income
The last dollar of income earned
Average tax rate
Tax credits only
Average tax rate is:
Total tax / taxable income
Marginal rate
Deduction amount
Capital gains tax
Adjusted Gross Income (AGI) is:
Gross income minus above-the-line deductions
Gross income minus itemized deductions
Gross income minus tax credits
Always equal to taxable income
Which of the following is an itemized deduction?
Mortgage interest
Wages
Dividends
Capital gains
A tax credit differs from a deduction because:
It reduces taxable income
It reduces tax liability dollar-for-dollar
It applies only to businesses
It increases taxable income
Which is taxed at preferential rates?
Ordinary income
Short-term capital gains
Long-term capital gains
Tax credits
Which is an example of a regressive tax?
Sales tax
Federal income tax
Estate tax
Corporate income tax
Which is an example of a progressive tax?
Federal income tax
Sales tax
Payroll tax
Gasoline tax
Which of the following reduces taxable income directly?
Deduction
Credit
Exemption
Capital gain
A person with taxable income of $50,000 in the 22% bracket has a marginal rate of:
10%
12%
22%
25%
Which is a depository institution?
Bank
Insurance company
Investment company
Brokerage firm
Which is a financial asset?
Car
House
Stock
Furniture
Consumer credit allows:
Borrowing now, paying later with interest
Avoiding debt
Eliminating taxes
Increasing net worth automatically
Which credit term reflects the true cost of borrowing?
Nominal interest rate
APR (Annual Percentage Rate)
Simple rate
Flat rate
Which is the largest factor in a credit score?
Payment history
Income level
Length of employment
Education level
Which action hurts your credit score most?
Paying late
Using less than 30% of credit
Paying bills on time
Having a mix of credit types
Which is a benefit of good credit?
Higher interest rates on loans
Easier approval for borrowing
Lower access to housing
Reduced income
Which is an example of revolving credit?
Credit card
Mortgage
Car loan
Student loan
Which type of loan usually has the lowest interest rate?
Credit card
Payday loan
Mortgage
Personal unsecured loan
Which practice helps maintain a high credit score?
Paying bills on time
Maxing out credit cards
Closing old accounts frequently
Applying for many new cards at once
