Economics of Choice

Wages are 

found by multiplying an hourly pay rate by the number of hours worked.

A W-4 form is

used by employers to determine the amount of income tax to withhold from employees' earnings.

Gross pay is 

the amount earned before deductions or taxes are taken out.

The FICA tax is used to fund  

Social Security and Medicare.

 Who pays FICA taxes?

Employers and employees

Income is 

the payment people receive for providing human resources (labor) in the market.

Taxes are

government fees on business and individual income, activities, products, or property.

A W-2 form is

a form employers must provide to employees shortly after year-end to report annual income and withholding for the employee's tax return.

Net pay is

the amount received after deductions and taxes have been taken out.

Which of the following statements is true?

You must fill out a W-4 each time you start a job and make changes when needed.

Completing the W-4 correctly is important because _________.

the goal is for your employer to withhold enough from your check to cover your taxes. 

If you’re unmarried and pay more than half the costs of keeping up a home for yourself and a qualifying individual, which of the following boxes should you select?

 

Head of household

Which of the following statements is true?

A dependent could be an elderly parent who lives with and depends on his or her child.

What is a temporary bank account set up by a tax-preparation service so that taxpayers can have their tax refund direct deposited by the IRS called? 

Refund anticipation check

What are the advantages of the refund anticipation check?

Receive refund faster than a paper check

True or False: A refund anticipation check can include hidden or unexpected fees for e-filing and document processing in addition to the account set up and tax preparation fees.

True

What is a short-term loan meant to be paid back when a borrower receives his tax refund?

Refund anticipation loan

True or False: The FDIC has prohibited banks from making refund anticipation loans, but many alternative financial service providers are able to issue these loans. 

True

True or False: The IRS has a website that allows you to file for free and have your refund direct deposited into your own account at a bank or credit union.

True

Capital gain means _____.

the price of a financial asset increased between the time it was purchased and the time it was sold

What is a stock?

A stock is a share of ownership in a publicly traded company.

How can a company raise money to grow?

 

It can issue an IPO.

Each of the following is a benefit of issuing stock to grow a business except __________.

 

giving up shares of ownership

Which of the following financial investments would be considered most risky?

 

Stocks

Which of the following financial investments would be considered most risky?

 

Commodities

What is meant by the statement, "the higher the risk, the higher the potential reward?

The potential for reward is greater with a riskier financial investment because prices are volatile, meaning they can decrease greatly or they can increase greatly.

Diversification offers all of the following benefits, except __________.

 

guaranteeing a positive return on your financial investments.

Which of the following investment options has the highest potential risk and the highest potential return?

Commodities

Which of the following investment choices are insured by the Federal Deposit Insurance Corporation [F.D.I.C]?

Bank checking accounts

True or False: There are investments that are both safer and provide higher returns than bonds.

False

Treasury Inflation Protected Securities [T.I.P.S], are used by which of the following?

The U.S. Government

If the yield on investment alternatives to bonds were to increase, the price of bonds would likely __________.

 

decrease

If an investor buys a bond that pays interest quarterly, he or she owns a __________.

 

coupon bond

True or False: Investors may buy I and E/EE Series Bonds for any incremental amount beginning at $25.00, and including dollars and cents.

True

Which of the following investments is most like a loan (or an I.O.U.)? 

Bonds

In bond terminology, which of the following terms is the same as “face value”?

Par value

Which of the following is a benefit of investing in mutual funds? 

Diversification

Which of the following best describes an investment company?

A company that collects and pools money from many investors and invests in stocks, bonds, and other assets 

What is the difference between actively managed funds and index funds?

Index funds attempt to match the returns of stock indexes like the Dow Jones Industrial Average.

Sales charges are paid when an investor sells the mutual fund shares in which of the following type of funds?

 

Deferred sales load fund shares

When employees’ contributions into a retirement account the waiting time before employees are entitled to all the funds is a process called:

Vesting

If you withdraw money from a tax-advantaged account you may have to pay a penalty for doing so. The penalty is:

10%

True or False: It is not possible for some investments within a mutual fund to decline in value while others increase in value.

False

True or False: Any employer match in a retirement account for employees is essentially free money to the employee. 

True

True or False: If you earn income from mutual fund investments you will probably have to pay income taxes. 

True

True or False: Some types of mutual funds and retirement accounts have different tax implications.

True

True or false: A meme stock is unlike a traditional stock in that the price of a meme stock is not determined by the laws of supply and demand.

False

True or false: The advent of the internet and the ability to buy stocks online is an example of a change in technology that increased access to stock market trading.

True

The main reason individuals buy stocks in the stock market is as

an investment

The value of GameStop stocks rose in correlation with

an increase in social media posts about the company and stock.

A meme stock

 

is a stock that has gained popularity on social media.

If everyone believes that a company will increase in value if a new law is passed, and most people believe that the new law will be passed in 6 months, what is the most likely activity that will occur now? Demand for its stock will

likely increase

Mobile trading apps differ from traditional brokerage firms in that many

lowered the minimum account balance for investors to utilize their services.

How have mobile trading apps changed the demographics of individual retail investors?

They have allowed for younger and first-time investors with a smaller account balance to participate in the stock market.

How does the return on stocks compare to other popular investment options such as T-bills and T-bonds?

Stocks on average have a higher return than both T-bills and T-bonds.

How do investors typically earn money on their stock purchases?

Through dividends and capital gains

What is diversification in the context of stock investing?

Investing in various financial instruments

What is the goal of an index fund?

To replicate the market

According to the Efficient Market Hypothesis (EMH), why is the stock market considered efficient?

Because it reflects all relevant information

What is one advantage of index funds mentioned in the article?

Lower investment costs

According to the article, what is the primary focus of active management in stock investing?

 

Outperforming the stock market

Which of the following is true of a passive investment strategy compared with an active management strategy?

Passive management strategies are more cost-effective in the long term.

What financial instrument is designed to provide investors with diversification?

Mutual funds

According to the article, what is the key consideration in the choice between investing in an active or passive mutual fund?

Your belief in an analyst’s ability to consistently beat the market

Financial experts recommend that you have ________________________ months of your monthly living expenses in savings.

6 to 12 

You can open one of these accounts without having your employer set it up.

 

IRA

Money saved in this type of account is money on which you have already paid taxes.

Roth IRA

Upon retirement, you will pay income taxes on money drawn from all of the account types below except the __________.

 

Roth IRA

Which of the following is true about a 401(k)?

You pay taxes on your salary, minus your 401 (k) contributions, and pay tax when you withdraw your money at retirement.

An IRA, Roth IRA, 401(k), and 403(b) are savings programs designed to help people when __________.

they need money after they leave the work force

If your employer offers a match of 3 percent of your earnings, and your earnings are $30,000, how much money should you save each year to take full advantage of the match?

$900

What are the two main categories of employer-based retirement savings options mentioned in the text?

Defined-benefit and defined-contribution plans

In a defined-contribution plan, who primarily makes investment decisions?

Employee

What is the key benefit of a Roth retirement account?

 

Tax-free withdrawals in retirement

When can you generally withdraw money from a retirement account without penalties?

After age 59½

What type of account allows you to continue contributing even if you change jobs?

 

Individual retirement account (IRA)

What is the recommended percentage of pre-retirement income one should aim for in retirement, according to financial advisors?

 

70-80%

What is the primary advice for making the most out of retirement savings, according to the text?

Start early and avoid early withdrawals from retirement accounts.

Most financial advisors earn compensation

generally through fees or commissions.

For self-employed individuals and small businesses, which retirement account has higher annual contribution limits compared with traditional IRAs?

Simplified employee pension (SEP)

What does Social Security, on average, replace in terms of annual pre-retirement earnings?

40%

What is one reason Katie’s car insurance is expensive?

She is a young and inexperienced driver.

What is the best way to describe a deductible? 

The amount by which your claim payment is reduced before the company pays. 

If an auto insurance policy coverage is listen as 50/100/50, what is the most the company would pay in total for bodily injury in a single accident?

 

$100,000

True or False: Subject to a policy limit, medical payments coverage will pay your medical expenses or those of anyone else in your car. 

True

What does the term ‘liable’ mean?

 

Responsible

Which of the following statements is true?

You can be responsible for the cost of an accident even if you are not the one driving your car.

True or False: In an at-fault accident, if the total cost of injuries is more than the policy coverage amount, the at-fault driver must somehow pay the remaining balance.

True

What coverage would pay for damage caused if a streetlight fell on your car while it was parked?

Comprehensive coverage

If you were found at-fault in an accident, which of the following would pay to repair your vehicle? 

Collision coverage

True or False: Collision, comprehensive, full glass, and roadside assistance coverage are usually optional.

 

True

True or False: If you are hurt by a driver who has no car insurance, uninsured motorist coverage would pay or your medical bills from your own policy. 

True

What does the term liable mean?

Legally responsible

Which of the following explanations of a 100/300/100 auto liability policy is correct? 

The first 100 indicates a $100,000 per person limit for bodily injury (BI). The 300 indicates a $300,000 limit for bodily injury per accident, and the second 100 indicates a $100,000 limit in property damage (PD) coverage. 

Suppose a person was at fault in an auto accident causing $75,000 in property damage. With a policy including liability limits of 100/300/50, how much would the insurance company pay for the $75,000 claim? 

 

$50,000

True or False: If the damage caused in an at-fault accident exceeded the policy limits, the remaining balance would be owed by the policy holder of the at-fault vehicle.

True

Which of the following statements is true?

The deductible amount will be applied to a repair first.

After an accident, which of the following will pay for things such as dental care, extended hospital stays, and even funeral expenses, regardless ofwhether another party has insurance and regardless of fault?

 

Medical payments coverage

True or False: Uninsured and underinsured motorist coverage will pay medical bills, or their passengers’ bills, if the other vehicle involved in an accident has too little or no insurance.

True

Which of the following losses would be paid from collision coverage?

An at-fault accident