Chapter 1: Financial & Economic Concepts

Question 1

Finance

Answer 1

Any transaction where money or money-like instruments is exchanged for another money or money-like instrument.

Question 2

Dividen

Answer 2

After-tax payment that may be made by a corporation to a stockholder.

Question 3

Prime Interest Rates

Answer 3

The rate of interest banks charge their best business customers.

Question 4

Market Economy

Answer 4

Within the confines of the market, all individuals can achieve their own objectives in a free-enterprise system.

Question 5

Market

Answer 5

Any organized effort which buyers & sellers freely exchange goods & services.

Question 6

What are the 3 primary participants in financial market?

Answer 6

1. individual house holds
2. businesses
3. government

Question 7

What are the 4 scarce resources of typical concern?

Answer 7

1. natural resources (minerals, land & wildlife - have not been modified by human activity)
2. human resources (mental & physical talents of people LABOR)
3. capital resources (economic & financial)
4. entrepreneurial resources (combine land, labor & capital resources to produce goods/services)

Question 8

Economical Capital

Answer 8

Items that people manufacture by combining natural and human resources.

Question 9

Financial Capital

Answer 9

Dollar-value claim on economic capital, and may include several types of assets (cash, accounts receivable, stocks & bonds).

Question 10

Opportunity Costs

Answer 10

The highest value surrendered when a decision to invest is made. A market transaction where the buyer & seller believe they obtained the best use of their scarce resources.

Question 11

Gross Income

Answer 11

The total money received from all sources during a year & is subject to government taxes (wages, tips, interest earned, rental income & profits)

Question 12

Progressive Taxes

Answer 12

Tax on income. Take a larger percentage of income as that income increases.

Question 13

Regressive Taxes

Answer 13

Sales tax. Take a higher percentage of income as that income decreases.

Question 14

Proportional Taxes

Answer 14

Tax on Social Security and Medicare. Regardless of income, the percentage paid stays the same

Question 15

What is the law of supply?

Answer 15

As the payment for, or price, of an item increases, the quality of the item supplied to the market will also increase, ceteris paribus.

Question 16

What is the law of demand?

Answer 16

As the price of an item decreases, people will demand a larger quantity of that item, ceteris paribus.

Question 17

What is the Federal Reserve?

Answer 17

It is the central bank of the United States.

Question 18

What are the 3 primary tools of the Feds?

Answer 18

1. open market operations
2. bank reserve requirements
3. discount rate

Question 19

What are the 5 major factors that affect market interest rates?

Answer 19

1. supply of money
2. demand for money
3. federal reserve monetary policy
4. inflation
5. risk

Question 20

Risk

Answer 20

The probability that an expected outcome will occur, and the variability in that expected outcome.

Question 21

Systematic Risk

Answer 21

Associated with economic, political & sociology changes that affect all participants on an equal basis.

Question 22

Unsystematic Risk

Answer 22

Unique to an individual, firm or industry. It is often based on management capabilities, industry competition, vendor reliability & microeconomic variables.

Question 23

True or False:

Finance is any transaction where money is exchanged for goods and services

Answer 23

False

Question 24

True or False:

A market economy is one where all goods and services are exchanged free.

Answer 24

False

Question 25

True or False:

A dividend is an after tax payment that must be made by all stock companies to the stockholders each year.

Answer 25

False

Question 26

True or False:

An athlete making $7,000,000 pays 6.2% on the full $7,000,000 in Social Security Taxes.

Answer 26

False

Social Security is capped at a max income of $110,100

Question 27

True or False:

In order to increase the money supply, the Fed will sell government securities.

Answer 27

False

Question 28

True or False:

As the price of an item increases, the quantity of the item provided to the market place will increase, ceteris paribus.

Answer 28

True.

Question 29

What percentage of Medicare is taxed on income?

Answer 29

1.45%, with no upper limit

Question 30

What percentage of Social Security is taxed on income?

Answer 30

6.2% with a wage capped at $110,100