Module 6 The Economic Environment and Consumer Protection Laws

Question 1

If the demand for a product is inelastic, it means that

A)
the price of the product cannot be increased or decreased.
B)
an increase in the price would have no effect on the total amount spent on purchases of the product.
C)
an increase in the price would lead to a decrease in the total amount spent on purchases of the product.
D)
an increase in the price would lead to an increase in the total amount spent on purchases of the product.

Answer 1

The answer is an increase in the price would lead to an increase in the total amount spent on purchases of the product. Theoretically, if a product exhibits inelastic demand characteristics, an increase in the price would lead to an increase in the total amount spent to purchase the product.

LO 6.1.1

Question 2

Dave is planning to refinance his mortgage with a local bank. While meeting with his banker, he is given a loan packet detailing the amount to be financed, the annual percentage rate (APR), and the loan’s terms and conditions. What legislation requires the bank to disclose this information to Dave?

A)
The Consumer Credit Protection Act
B)
The Fair Debt Collection Practices Act
C)
Consolidated Omnibus Budget Reconciliation Act
D)
The Banking Act of 1933

Answer 2

The answer is the Consumer Credit Protection Act. Also known as the Truth in Lending Act, the Consumer Credit Protection Act requires lenders, before extending credit, to disclose both the dollar amount of finance charges and the annual percentage rate (APR), as well as other loan terms and conditions. The Act also limits consumer liability for a lost or stolen credit card to the amount charged or a maximum of $50 per card, whichever is less. The requirements of this Act are often encountered when a consumer enters into a mortgage agreement with a lender and closes on a personal residence.

LO 6.2.2

Question 3

What is the term used to describe the Federal Reserve’s controlling the money supply, enabling it to significantly affect interest rates?

A)
Consumer Price Index
B)
Monetary policy
C)
Fiscal policy
D)
Inflation

Answer 3

The answer is monetary policy. The Fed will follow an easy, expansionary policy when it wishes to increase the money supply and ultimately decrease interest rates and use a tight, restrictive policy when it wishes to decrease the money supply and ultimately increase interest rates.

LO 6.1.2

Question 4

If the central monetary authorities want to slow the rate of inflation, the central bank should

A)
raise the discount rate to reduce the money supply; this will cause interest rates to rise and loan demand to fall, thereby decreasing demand for goods and services.
B)
decrease the discount rate to lower the market rate of interest; this will cause both costs and prices to fall.
C)
decrease taxes, which will reduce costs and cause prices to fall.
D)
buy government bonds to reduce the money supply; this will cause interest rates to rise and aggregate demand to fall.

Answer 4

The answer is raise the discount rate to reduce the money supply; this will cause interest rates to rise and loan demand to fall, thereby decreasing demand for goods and services. To slow inflation, the Fed needs to decrease the money supply, which it can do with several of the tools available to it. One tool is the discount rate; to decrease the money supply, the Fed raises the rate. When the money supply is reduced, loan demand falls because interest rates rise; then demand for products and services decreases. Buying government bonds increases the money supply. Raising taxes is a way to fight inflation.

LO 6.1.2

Question 5

Which of these factors are typically present during an economic expansion?

A)
Demand and inflation are rising; unemployment and housing starts are declining.
B)
Housing starts and retail sales are rising; mortgage debt and consumer sentiment are declining.
C)
Retail sales and auto sales are rising; consumer credit is declining.
D)
Income and demand are rising; inflation and unemployment are declining.

Answer 5

The answer is income and demand are rising; inflation and unemployment are declining. Consumer sentiment will also be rising, and mortgage debt will be rising too as consumers feel more confident about the future and taking on debt. Retail and auto sales are rising, along with consumer credit as consumers purchase more goods.

LO 6.1.3

Question 6

Inflation typically begins increasing during which phase of the business cycle?

A)
Inertia to trough
B)
Contraction to inertia
C)
Peak to contraction
D)
Expansion to peak

Answer 6

The answer is expansion to peak. Inflation is growing most rapidly as the business cycle approaches its peak. Inflation typically begins decreasing as the business cycle moves from peak to trough.

LO 6.1.4

Question 7

A Chapter 13 bankruptcy has which of these characteristics?

The debtor is generally required to relinquish assets to discharge debts.
All debts are forgiven or discharged.
The debtor generally is not required to relinquish assets.
It is sometimes referred to as the wage earner plan.
A)
I and IV
B)
II and III
C)
III and IV
D)
I, II, and IV

Answer 7

The answer is III and IV. Under Chapter 13 bankruptcy, a plan is created under which the debtor will repay outstanding debts within a specified time period. Rather than debts being forgiven or discharged, they are included in the repayment plan.

LO 6.2.1

Question 8

Which of these protections is not provided by the Fair Credit Reporting Act?

A)
The consumer is given the right to review his or her report at any time free of charge.
B)
If a consumer is denied credit, he or she has the right to receive a copy of the credit report provided by the credit bureau free of charge.
C)
If there are errors in the report, the bureau must correct them and, if requested by the consumer, submit the corrected report to any recipient of the report in the last six months.
D)
If the consumer and credit bureau do not agree regarding the facts contained in the report, the consumer has the right to include his or her version of the facts in the report.

Answer 8

The answer is the consumer is given the right to review his or her report at any time free of charge. A consumer who is denied credit has the right to receive a copy of the credit report provided by the credit bureau free of charge. However, the consumer may review his or her report at any time for a nominal charge, not for free. The credit bureau must correct errors in the credit report and submit the corrected report to any recipient of the report in the last six months. Where the consumer and the credit bureau do not agree regarding the facts contained in the credit report, the consumer is permitted to include his or her version of the facts in the report.

LO 6.2.2

Question 9

Which of these statements regarding the Fair Credit Billing Act is CORRECT?

Requires creditors to respond within 60 days of the date that billing error complaints are received from consumers
Requires credit report bureaus to include accurate, relevant, and recent information regarding the financial status of credit applicants
A)
Neither I nor II
B)
Both I and II
C)
I only
D)
II only

Answer 9

The answer is neither I nor II. The Fair Credit Billing Act requires consumers to notify creditors in writing of any billing errors within 60 days of the date the billing statement is received. Creditors must then respond within 30 days of the date that billing error complaints are received from consumers. The Consumer Credit Reporting Reform Act requires that accurate, relevant, and recent information regarding the financial status of credit applicants be reported.

LO 6.2.2

Question 10

The answer is neither I nor II. The Fair Credit Billing Act requires consumers to notify creditors in writing of any billing errors within 60 days of the date the billing statement is received. Creditors must then respond within 30 days of the date that billing error complaints are received from consumers. The Consumer Credit Reporting Reform Act requires that accurate, relevant, and recent information regarding the financial status of credit applicants be reported.

LO 6.2.2

Answer 10

The answer is demand is inelastic. Demand is inelastic if the quantity demanded responds relatively little to price changes.

LO 6.1.1

Question 11

Which of these are measures of the Fair and Accurate Credit Transaction Act (FACTA) that provides consumers greater protection against identity theft?

Consumer information must be disposed of by companies in a secure manner.
Individuals can place alerts on their credit histories if identity theft is suspected.
Consumers can place alerts on their credit histories if deploying overseas in the military.
Consumers may obtain a free credit report every 12 months from each of the three national credit reporting agencies.
A)
I and II
B)
I and IV
C)
II, III, and IV
D)
I, II, III, and IV

Answer 11

The answer is I, II, III, and IV. FACTA added new sections to the federal Fair Credit Reporting Act to provide consumers greater protection against identity theft.

LO 6.2.2

Question 12

The primary function of the Federal Reserve System (the Fed) is to

A)
carry out monetary policy.
B)
implement fiscal policy.
C)
manage the revenues and expenditures of the federal government.
D)
issue savings bonds to the general public.

Answer 12

The answer is carry out monetary policy. The Federal Reserve controls the money supply, enabling it to significantly affect interest rates. The Fed will follow a loose, or easy, monetary policy when it wants to increase the money supply to expand the levels of income and employment. In times of inflation, when it wants to constrict the money supply, the Fed will follow a tight monetary policy. The U.S. Treasury issues bonds to the general public to finance the budget deficits of the federal government.

LO 6.1.2

Question 13

Which of these types of information must be included in loan documents under Regulation Z of the Truth in Lending law?

A)
All of these
B)
Prepayment information
C)
Charges for late payments
D)
Right of rescission

Answer 13

The answer is all of these. Charges for late payments, the lender’s right of rescission, and prepayment information are all part of the information required. Other required information includes when payments begin, the amount financed, and the annual percentage rate.

LO 6.2.2

Question 14

Which of these statements regarding the Federal Reserve’s use of the discount rate is CORRECT?

The Fed will lower the discount rate in order to increase the money supply.
To curb inflation, the Fed will raise the discount rate.
If the Fed lowers the discount rate, banks will be able to borrow funds at lower rates.
To contract the money supply, the Fed will raise the discount rate.
A)
II and III
B)
I, II, III, and IV
C)
I, III, and IV
D)
II only

Answer 14

The answer is I, II, III, and IV. All of these statements are correct. To follow an expansionary (easy) monetary policy, the Federal Reserve will lower the discount rate. To institute a restrictive (tight) monetary policy, the Federal Reserve will raise the discount rate.

LO 6.1.2

Question 15

Which of these statements regarding economic indicators is CORRECT?

Leading indicators are represented by bond yields and housing starts.
Examples of lagging indicators include the prime rate and orders for durable goods.
Economic indicators help determine the current stage of the business cycle.
Coincident indicators occur concurrently during the business cycle and confirm the stage the economy is currently experiencing.
A)
III only
B)
I, III, and IV
C)
I and II
D)
I, II, and III

Answer 15

The answer is I, III, and IV. Orders for durable goods are considered a leading economic indicator. In addition to the prime rate, lagging indicators include the change in the Consumer Price Index (particularly for services), the amount of business and consumer loans outstanding, and the average duration of unemployment.

LO 6.1.4

Question 16

Which of these statements on economic indicators is CORRECT?

Changes in CPI, particularly for services, serve as a confirming indicator and usually change after the economy has passed through one business cycle and allow confirmation of a previous economic environment.
Indexes of stock prices, serve as a leading indicator, and tend to precede actual economic change.
A)
Both I and II
B)
Neither I nor II
C)
II only
D)
I only

Answer 16

The answer is both I and II. Changes in CPI are considered confirming, or lagging indicators, while indexes of stock prices serve as a leading indicator.

LO 6.1.3

Question 17

All of these are examples of leading economic indicators except

A)
orders for durable goods.
B)
bond yields.
C)
industrial production.
D)
housing starts.

Answer 17

The answer is industrial production. Leading indicators are those that tend to precede actual economic change, such as changes in investor sentiment. Industrial production is an example of a coincident indicator that occurs simultaneously during the business cycle and confirms the stage the economy is currently experiencing.

LO 6.1.4

Question 18

All of these are often used as leading indicators of a change in the economy except

A)
housing starts.
B)
stock market.
C)
average employment duration.
D)
durable goods orders.

Answer 18

The answer is average employment duration. Leading indicators include housing starts, new claims for unemployment, the direction of the stock market and interest rates, changes in investor sentiment, and orders for durable goods. Average duration of employment is a lagging or confirming indicator.

LO 6.1.3

Question 19

Which term refers to the taxation, expenditures, and debt management of the federal government?

A)
Open market operations
B)
Fiscal policy
C)
Monetary policy
D)
Revenue code procedures

Answer 19

The answer is fiscal policy. Economic growth, price stability, and full employment are goals the government pursues through fiscal policy.

LO 6.1.2

Question 20

Which of these best describes the economic phase in which unemployment increases and businesses operate at their lowest capacity levels?

A)
Contraction
B)
Trough
C)
Peak
D)
Expansion

Answer 20

The answer is trough. A trough in a business cycle occurs at the end of a contraction phase when businesses are operating at their lowest capacity levels.

LO 6.1.3

Question 21

Which of these are characteristics of Chapter 13 bankruptcy provisions?

Repayment plan is implemented.
The debtor is typically not required to relinquish assets.
Debt payments may be reduced so payments are more manageable for the debtor.
Generally, Chapter 13 bankruptcy is less favorable for creditors than Chapter 7 bankruptcy.
A)
I, II, and III
B)
I, III, and IV
C)
IV only
D)
II and III

Answer 21

The answer is I, II, and III. Chapter 13 bankruptcy is generally more favorable for creditors because they receive at least some portion of what is owed. In a Chapter 13 bankruptcy, the debtor repays at least a portion of the debts over a specified time. Creditors may not receive any payments under a Chapter 7 bankruptcy.

LO 6.2.1

Question 22

Which of these situations is not an example of where your knowledge of consumer protection laws could benefit clients?

A)
A client’s son has been having difficulty getting a job. He goes for interviews, but after a background check, he is not being hired.
B)
A client made a major purchase using credit from a door-to-door salesman last week and is now regretting it five days later.
C)
A client tells you they have lost their wallet and are concerned that it may have been stolen.
D)
A client tells you about her credit being denied, and she doesn’t know why.

Answer 22

The answer is a client made a major purchase using credit from a door-to-door salesman last week and is now regretting it five days later. You may know the provisions of the Consumer Credit Protection Act, which state that the client had three days to exercise the right of rescission, but that won’t be helpful here since the timeline has passed. Knowing the rules about lost or stolen credit cards can help you guide this client to appropriate action of notifying the credit and debit card companies. One can limit potential risks through this process. Knowing that the client can ask for this information to be corrected and all creditors who have run requests to be notified is helpful. Knowing that employers are asking for credit checks as part of a typical background check could be helpful. The son can contact the credit reporting agencies, review and ask for corrections, and have correct reports sent to any employers to whom he has applied in the last two years.

LO 6.2.2

Question 23

Which of these is a way that identity thieves steal personal information?

By skimming, which involves stealing credit or debit card information by using a special storage device when processing these types of cards
By phishing, which involves posing as a financial institution or company and sending spam over the Internet to persuade an individual to provide personal information
A)
I only
B)
Neither I nor II
C)
II only
D)
Both I and II

Answer 23

The answer is both I and II. Both skimming and phishing are tactics used by identity thieves.

LO 6.2.2

Question 24

Which of the following best describe(s) the actions of a fiscal policy economist?

Increase in government spending
Decrease in the money supply
Decrease in income taxes
Increase in the inflation rate
A)
II and IV
B)
I, II, III, and IV
C)
I and III
D)
I only

Answer 24

The answer is I and III. Fiscal policy economists believe that the economy can be controlled through the use of government spending and income tax adjustments. Statements II and IV describe economists who believe that economic activity is controlled through the use of the money supply.

LO 6.1.2

Question 25

Which of the following statements best describes a downward sloping demand curve? A) Consumers demand more at lower prices. B) Consumer demand has not changed significantly. C) Consumer demand has increased significantly. D) Consumer demand has dropped drastically.

Answer 25

The answer is consumers demand more at lower prices. Consumers demanding more at lower prices describes a downward sloping demand curve. LO 6.1.1

Question 26

The type of bankruptcy in which a person is freed from most debts in exchange for giving creditors assets that legally may be seized is called A) Chapter 9 bankruptcy. B) Chapter 13 bankruptcy. C) Chapter 11 bankruptcy. D) Chapter 7 bankruptcy.

Answer 26

The answer is Chapter 7 bankruptcy. Chapter 11 applies mostly to businesses and Chapter 13 is one in which a plan is created for the debtor to repay outstanding debts within a specified time period. LO 6.2.1

Question 27

The responsiveness of the quantity demanded of a good to changes in the good's price, other things being held constant, is called A) substitution effect. B) equilibrium. C) price elasticity. D) demand curve shift.

Answer 27

The answer is price elasticity. A good is elastic when its quantity demanded responds greatly to price changes (e.g., luxury items) and is inelastic when its quantity demanded responds little to price changes (e.g., food). LO 6.1.1

Question 28

Which of these obligations could possibly be reduced or eliminated in a personal bankruptcy? A) Student loans B) Installment payments C) IRS tax obligation D) 401(k) loan

Answer 28

The answer is installment payments. Installment payments could potentially be reduced or eliminated in a personal bankruptcy. Student loans and IRS tax obligations will not be eliminated through bankruptcy. 401(k) loans will not be eliminated through bankruptcy because the lienholder is the client. If the client defaults on the 401(k) loan, the entire loan will be taxable as a distribution immediately. LO 6.2.1

Question 29

All of these statements regarding the provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the 2005 Bankruptcy Act) are correct except A) people who have the ability to pay their debts can choose between filing under Chapter 7 or filing under Chapter 13. B) the use of Chapter 7 is limited to the liquidation of credit bills or loans that are not secured. C) lenders must provide consumer information about the dangers of paying only minimum required payments on credit card debt. D) debtors who want to file for Chapter 7 must first undergo credit counseling.

Answer 29

The answer is people who have the ability to pay their debts can choose between filing under Chapter 7 or filing under Chapter 13. Under the 2005 Bankruptcy Act, people who have the ability to pay their debts must file under Chapter 13 (reorganization) rather than having their debts canceled entirely under Chapter 7. LO 6.2.1

Question 30

The federal funds rate will tend to move upward under which of these conditions? A) The Federal Reserve lowers the discount rate. B) The Federal Reserve is buying government securities. C) A few banks have reserve deficiencies, and the rest have ample excess reserves. D) A few banks have excess reserves, and the rest have significant reserve deficiencies.

Answer 30

The answer is a few banks have excess reserves, and the rest have significant reserve deficiencies. Short-term interest rates increase when the money supply is being tightened. Among the reasons why the money supply is tight is when banks are unable to meet their reserve requirements and must borrow from the Fed. If the banks have excess liquidity, then monetary policy is accommodative. When the Fed buys government securities or lowers the discount rate, it is increasing the money supply and interest rates will decrease. LO 6.1.2

Question 31

Which of these provisions are not part of the Fair Credit Reporting Act of 1971 (as amended)? A standard method of reporting interest must be used. The issuer of installment credit must provide written disclosures in easy-to-understand language. A creditor who has denied credit must notify the consumer about which credit reporting agency provided information to the potential creditor. Obsolete information must be deleted from a consumer's credit report. A) III and IV B) I, II, and IV C) I, II, and III D) I and II

Answer 31

The answer is I and II. The Fair Credit Reporting Act requires potential creditors who have denied credit to notify the consumer about which reporting agency provided information to the creditor, and it requires that obsolete information be deleted from a consumer's credit report. The establishment of a standard method of reporting interest and the written disclosure requirement both refer to Truth in Lending (Consumer Credit Protection Act). LO 6.2.2

Question 32

In a typical business cycle, which of the following phases would exhibit periods of increasing employment and increasing output? A) Expansion B) Recession C) Trough D) Peak

Answer 32

The answer is expansion. An expansion is indicated by rising employment and output. When employment and output are no longer rising, the cycle is at its peak. If employment and output begin to decrease, this indicates a recession. Finally, when employment and output are no longer decreasing, the cycle has reached a trough. LO 6.1.3

Question 33

Rose enjoys surfing the internet in her free time. Recently, she went to a seminar on internet safety and identity theft. Here, she learned about individuals who pose as financial institutions and send spam over the internet to entice individuals to reveal their personal information. This information may then be used to steal the individual's identity. This practice is known as A) phishing. B) skimming. C) pilfering. D) ripping.

Answer 33

The answer is phishing. Phishing involves posing as a financial institution or company and sending spam over the internet to entice individuals to provide personal information in an attempt to steal a person's identity. Skimming involves the stealing of credit or debit card information by using a special storage device when processing these types of cards. Ripping and pilfering are not identity theft tactics. LO 6.2.2

Question 34

An increase in the general level of prices is A) deflation. B) disinflation. C) inflation. D) stagflation.

Answer 34

The answer is inflation. The rate of change in the general price level is the rate of inflation. Disinflation indicates a decline in the rate of inflation. Deflation is a decline in the general price level. Stagflation occurs when inflation and unemployment rise and the general growth of the economy is slow as business output falls. LO 6.1.4

Question 35

What is the most likely cause of an increase in the money supply? A) Consumer demand has increased. B) The Fed has bought securities. C) Bank reserves have increased. D) Bank lending has decreased.

Answer 35

The answer is the Fed has bought securities. Of the options given, the most likely cause of an increase in the money supply is that the Fed has bought securities, thus injecting money into the banking system. A decrease in bank lending is typically caused by a decrease in available bank reserves, which in turn is caused by the Fed selling securities. Changes in consumer demand do not have a direct relationship to the money supply. An increase in bank reserves is a result of the increase in the money supply, not the cause. LO 6.1.2

Question 36

Jason is delinquent on a number of credit card payments. He is concerned that these creditors will start to use scare tactics in order to embarrass and humiliate him until he pays the debts. What act prohibits creditors from harassing Jason? A) The Consumer Credit Protection Act B) The Bankruptcy Act of 2005 C) The Fair Debt Collection Practices Act D) The Bank Act of 1933

Answer 36

The answer is the Fair Debt Collection Practices Act. The Fair Debt Collection Practices Act prohibits debt collectors from engaging in certain practices, such as contacting a debtor at his place of employment if the employer objects, harassing or intimidating the debtor, or using false and misleading approaches. A state court may issue an order for garnishment of a portion of a debtor's wages in order to satisfy a legal judgment obtained by a creditor. LO 6.2.2

Question 37

Demand for necessities, such as electricity and food, responds relatively little to changes in price. Therefore, these types of goods are considered A) elastic. B) stagflated. C) at equilibrium. D) inelastic.

Answer 37

The answer is inelastic. The demand for inelastic goods changes very little when their prices change because they are necessities. LO 6.1.1

Question 38

The CPI program is characterized by all of these except A) quantifying a representative basket of goods and services. B) production of monthly data on changes in the prices. C) measurement of the average change over time in the selling prices received by domestic producers for their output. D) tracking of prices paid by urban consumers.

Answer 38

The answer is measurement of the average change over time in the selling prices received by domestic producers for their output. The PPI program measures the average change over time in the selling prices received by domestic producers for their output. The CPI program produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services. LO 6.1.4

Question 39

Which of these is NOT a state law exemption found in Chapter 7 of the Federal Bankruptcy Code? A) Pension and retirement plan rights (ERISA plans) B) Child support C) Some limited amount of personal property D) An exemption for one’s homestead

Answer 39

The answer is child support. Other state law exemptions include the existing cash value of any life insurance policies, the proceeds of any annuity contracts, disability income benefits, and property that is held as tenants by the entirety. LO 6.2.1

Question 40

Which of these items may be discharged in a Chapter 7 bankruptcy? Child support Tort claim for negligence(nonintentional) Federal taxes (past two years) Consumer debt Consumer debt A) I, II, and IV B) II and IV C) I and IV D) II and III

Answer 40

The answer is II and IV. Child support and federal taxes due within the past three years are not dischargeable. Nonintentional tort claims and consumer debt may be discharged. LO 6.2.1

Question 41

Which of these statements is true concerning bankruptcy? A) Student loan debt is often reduced in bankruptcy. B) A debtor may not file for bankruptcy again under Chapter 7 for six years. C) Planners can rely on state laws to supersede federal laws in regard to property retention. D) A debtor is generally not required to relinquish Social Security payments, unemployment insurance, royalties, and alimony payments.

Answer 41

The answer is planners can rely on state laws to supersede federal laws in regard to property retention. It is true that planners can rely on state laws to supersede federal laws on property retention. Planners should rely on state laws versus federal laws for property retention. Debtors may be required to relinquish royalties. LO 6.2.1

Question 42

The anticipation of inflation suggests that the investor should A) sell stocks of gold companies. B) anticipate higher interest rates. C) avoid real estate investments. D) buy bonds.

Answer 42

The answer is anticipate higher interest rates. Real assets, gold and real estate among them, should do well in inflationary times. Bonds do poorly because interest rates will increase to fight inflation, and increases in interest rates cause bond prices to fall. LO 6.1.4

Question 43

With respect to business cycles, the classic definition of a recession is A) an annualized year over year decrease in real GDP. B) a decrease in real GDP for two consecutive quarters. C) a decrease in real GDP for two out of the last four quarters. D) a decrease in real GDP for the quarter and a stock market decline of greater than 10%.

Answer 43

The answer is a decrease in real GDP for two consecutive quarters. The classic definition of a recession is when GDP has experienced a decrease in real terms for two consecutive quarters or a minimum of six months from a baseline of zero. LO 6.1.3

Question 44

Your client, a single person with no dependents, comes to you and inquires about the possibility of filing for Chapter 7 bankruptcy. Under the laws of most states, which of these items is exempt from creditors? A) Wages earned B) An extravagant home C) Student loan proceeds D) Accrued pension benefits

Answer 44

The answer is accrued pension benefits. Under most states' laws, pension benefits are exempt from creditors once an individual files for bankruptcy. Although a homestead may be exempt, there is usually a cap or ceiling on the value of the home that may be protected. LO 6.2.1

Question 45

When prices are still rising (but at a declining rate), this is known as A) disinflation. B) deflation. C) stagflation. D) inflation.

Answer 45

The answer is disinflation. When prices are still rising (but at a declining rate), disinflation exists. LO 6.1.4

Question 46

Which of theseare included among the tools available to the Federal Reserve (the Fed) to accomplish its responsibilities? Open market operations Taxation Discount rate Reserve requirement A) I, II, III, and IV B) I, III, and IV C) I, II, and III D) III and IV

Answer 46

The answer is I, III, and IV. The Fed does not control fiscal policy, which includes taxation decisions; those decisions are made by Congress and approved by the president. In addition to open market operations and the discount rate, the Fed also controls bank reserve requirements. Debt used in its capital structure. LO 6.1.2

Question 47

Which of these types of goods would typically exhibit the highest price elasticity? A) Food B) Gasoline C) Baby formula D) Jewelry

Answer 47

The answer is jewelry. Demand for necessities such as food, gasoline, and baby formula responds very little to prices changes, so demand for these goods is price inelastic. Demand for luxuries, such as jewelry, responds more to price changes, so demand is price elastic. LO 6.1.1

Question 48

You subscribe to Barron's and have noticed that the money supply has been increasing sharply on a weekly basis. Your advisor informs you that the Federal Reserve Board is responsible for the money supply growth. What are the tools the Fed uses to influence the money supply? Changing tax policy Changing the discount rate Buying or selling securities Changing bank reserve requirements A) I only B) II, III, and IV C) III only D) III and IV

Answer 48

The answer is II, III, and IV. The Federal Reserve Board may use open-market operations, changes in the discount rate, or changes in the reserve requirement to affect the money supply. Only Congress changes tax policy. LO 6.1.2

Question 49

When the Federal Reserve buys government securities, which one of the following results is most likely to occur? A) Bond prices will rise, and stock prices will fall. B) Bond and stock prices will fall. C) Stock prices will rise, and bond prices will fall. D) Bond and stock prices will rise.

Answer 49

The answer is bond and stock prices will rise. When the Fed buys securities, it receives paper evidencing debt owed to it from the federal government, and it transfers cash to the sellers of those securities. This increases the money supply, causes interest rates to decrease and bond prices to rise, and encourages consumers and businesses to borrow money for purchases. The increasing demand for goods and services, in turn, causes stock prices to increase. LO 6.1.2

Question 50

All of these are likely decline in value during a deflationary period except A) collectibles. B) real estate. C) bond prices. D) precious metals.

Answer 50

The answer is bond prices. Bond prices rise and purchasing power increases during deflation. A deflationary period can be a time during which real assets perform poorly, thus real estate, collectibles, and gold and other precious metals are likely to fall in value. LO 6.1.4

Question 51

All of these economic activities represent fiscal policy except A) increases in purchases of goods and services. B) cuts to the federal funds rate. C) tax increases to dampen consumption and discourage private investment. D) tax cuts.

Answer 51

The answer is cuts to the federal funds rate. The Federal Reserve sets the discount rate, upon which the federal funds rate is based. The Fed will lower the discount rate when it wants to increase the money supply. When the government increases purchases of goods and services or cuts taxes, it is an example of expansionary fiscal policy. If the government raises taxes to dampen consumption and discourage private investment, it is an example of restrictive fiscal policy. LO 6.1.2

Question 52

If the Federal Reserve Board (Fed) wants to expand economic activity, it may A) buy government securities, thus increasing the money supply and driving down overall interest rates. B) buy government securities, thus decreasing the money supply and driving down overall interest rates. C) sell government securities, thus increasing the money supply and driving down overall interest rates. D) sell government securities, thus decreasing the money supply and driving up overall interest rates.

Answer 52

The answer is buy government securities, thus increasing the money supply and driving down overall interest rates. If the Fed wants to expand economic activity, it may put more money into the economy by purchasing government securities. This action will decrease interest rates, thus stimulating the economy. LO 6.1.2

Question 53

Which of the following economic activities represents an example of monetary policy? The discount rate is increased. Congress passes a tax cut. Bank reserve requirements are lowered by the Federal Reserve. The Federal Open Market Committee sells securities. A) I, III, and IV B) I and IV C) I, II and III D) II, III, and IV

Answer 53

The answer is I, III, and IV. Tax legislation is fiscal, not monetary policy. The Federal Reserve Bank controls monetary policy by increasing or decreasing reserve requirements for member banks, increasing or decreasing the discount rate, and purchasing or selling government securities. The federal government controls fiscal policy by increasing or decreasing taxes, increasing or decreasing government expenditures, and purchasing or selling securities in the open market (surplus/deficit spending). LO 6.1.2

Question 54

The Federal Reserve can take all of the following actions if it wants to follow a restrictive monetary policy except A) sell government securities. B) raise the discount rate. C) raise the reserve requirement. D) lower income tax rates.

Answer 54

The answer is lower income tax rates. Lowering income taxes would be a part of a fiscal policy strategy. LO 6.1.2

Question 55

Which of the following is NOT characteristic of the Consumer Credit Reporting Act? A) Access to a credit file is limited to bona fide users of financial information. B) Protection against unauthorized credit card use is provided. C) Applicants who are denied credit must be offered the reason. D) Credit bureau reports must include accurate, relevant, and recent information.

Answer 55

The answer is protection against unauthorized credit card use is provided. Statement 1 is incorrect; protection for unauthorized credit card use is provided by the Consumer Credit Protection Act. LO 6.2.2

Question 56

Under the laws of most states, which of the following is exempt from creditors in a Chapter 7 bankruptcy? A) Pension benefits B) A home, regardless of value C) Student loan proceeds D) Recent federal income taxes due

Answer 56

The answer is pension benefits. In most states, pension benefits are exempt from creditors once an individual files for bankruptcy. Although a homestead may be exempt, there is usually a cap or ceiling on the value of the home that may be protected. LO 6.2.1

Question 57

Which of the following is a provision of the Bankruptcy Act of 2005? Debtors who want to file for Chapter 7 bankruptcy are first required to submit to credit counseling. Individuals who have the ability to pay their debts are required to file under Chapter 7 of the Federal Bankruptcy Code. A) II only B) Both I and II C) Neither I nor II D) I only

Answer 57

The answer is I only. Individuals who have the ability to pay their debts are required to file under Chapter 13 of the Federal Bankruptcy Code. LO 6.2.1

Question 58

Which of these might cause an increase in supply? A decrease in productivity Fewer sellers in the marketplace More efficient technology A decrease in government subsidies A) II and IV B) IIand III C) III only D) I and III

Answer 58

The answer is III only. A key element that affects supply is the cost of production. More efficient technology will decrease the cost of production. LO 6.1.1

Question 59

The demand curve shows that A) demand for a product varies inversely with price. B) there is a direct relationship between changing prices and total receipts. C) the relative change in price is caused by changes in demand. D) consumers select alternative ways of spending income.

Answer 59

The answer is demand for a product varies inversely with price. The demand curve shows that, all else being equal, when the price of a good rises, demand decreases and vice versa. LO 6.1.1

Question 60

Which of the following occurs when the price of a product decreases and consumers buy more of that product? A) A change in inelastic demand has taken place. B) An increase in supply has occurred. C) A change in quantity demanded has taken place. D) The product is a complementary product.

Answer 60

The answer is a change in quantity demanded has taken place. The demand curve shows that the quantity demanded for a product varies inversely with its price. LO 6.1.1

Question 61

Which of the following interest rates is directly controlled by the Federal Reserve Board? A) Prime rate B) Reserve rate C) Federal funds rate D) Discount rate

Answer 61

The answer is discount rate. The only interest rate the Federal Reserve Board directly controls is the discount rate, which is the rate at which banks can borrow from any of the Federal Reserve Banks. The Fed targets, not controls, the federal funds rate (the interest rate charged on short-term borrowing between banks) in its interest rate decisions. LO 6.1.2

Question 62

Which of the following best describes deflation? A) A decline in the general price level and is often caused by an increase in the money supply and consumer demand B) Occurs when inflation and unemployment rise and the general growth of the economy is slow as business output falls C) Indicates a decline in the rate of inflation D) Prices are falling in absolute terms, bond prices rise, and purchasing power increases

Answer 62

The answer is prices are falling in absolute terms, bond prices rise, and purchasing power increases. A deflationary period also can be a time during which real assets perform poorly, thus real estate, collectibles, and gold and other precious metals are likely to fall in value. LO 6.1.4

Question 63

Purposes of the Federal Reserve include establishing the prime rate. influencing and monitoring the flow of capital. establishing federal income tax rates. maintaining steady economic growth with moderate inflation. A) II and IV B) II, III, and IV C) I, III, and IV D) II only

Answer 63

The answer is II and IV. Commercial banks establish the prime rate. The executive branch or Congress initiates any changes regarding federal income tax rates with legislation. Controlling the flow of capital to maintain steady economic growth with moderate inflation is the primary purpose of the Fed. LO 6.1.2

Question 64

Which of the following statements regarding supply is CORRECT? Generally, the higher the price that can be obtained, the higher the quantity supplied. The supply curve is usually represented as sloping downward from left to right. A) I only B) II only C) Neither I nor II D) Both I and II

Answer 64

The answer is I only. A higher price level usually results in a higher level of supply, which is represented by an upward-sloping curve from left to right. LO 6.1.1

Question 65

The Fair Debt Collection Practices Act does not allow debt collectors to engage in all of the following practices except A) seeking a court order for wage garnishment to satisfy a legal judgment. B) harassing or intimidating a debtor or using false and misleading approaches. C) contacting third parties about the payment of the debt without court authorization. D) contacting a debtor at his place of employment if the employer objects.

Answer 65

The answer is seeking a court order for wage garnishment to satisfy a legal judgment. A state court may issue an order for garnishment of a portion of a debtor's wages in order to satisfy a legal judgment that was obtained by a creditor. LO 6.2.2

Question 66

Which of the following are methods of protecting against identify theft? Monitoring bank accounts Regularly inspecting credit reports Reviewing financial and billing statements Closing accounts that appear to have suspicious activity A) III and IV B) I, II, and III C) I, II, and IV D) I, II, III, and IV

Answer 66

The answer is I, II, III, and IV. All of these are prudent measures individuals should take to protect themselves against identity theft. LO 6.2.2

Question 67

Recently, Congress has been pursuing deficit spending policies. In addition, the Federal Reserve is considering decreasing the discount rate and entering the open market to purchase existing Treasury securities. If these alternatives are pursued, what is the likely effect, if any, on the amount of bank loans? A) Lending activity will decrease. B) Disintermediation will occur such that investors will seek other sources of funds. C) These actions will cause no impact on the amount of bank loans. D) Lending activity will increase.

Answer 67

The answer is lending activity will increase. Both Congress and the Federal Reserve are pursuing expansionary policies. As a result, the amount of reserves available to banks will increase, leading to additional lending activity. Note that the fiscal policy of deficit spending has no direct impact on the amount of bank loans, although expansionary policies do encourage further lending activity. LO 6.1.2

Question 68

If the Consumer Price Index (CPI) is down but consumer demand is up, the economy is likely in which stage of the business cycle? A) Recovery to expansion B) Peak to contraction C) Recovery to trough D) Contraction to trough

Answer 68

The answer is recovery to expansion. As prices trend downward and consumer demand increases, the economy is moving from recovery to expansion. As demand continues to increase, assuming supply remains constant, upward pressure will be put on prices through the expansion to the peak. LO 6.1.1

Question 69

Deflation is characterized by rising unemployment. caused by a reduction in the money supply. the opposite of inflation. a decline in the rate of inflation. A) II and III B) I, II, and III C) I, II, III and IV D) I and IV

Answer 69

The answer is I, II, and III. Disinflation, not deflation, is characterized by a decline in the rate of inflation. LO 6.1.4

Question 70

The Fair Debt Collection Practices Act prohibits debt collectors from engaging in all of the following practices except A) harassing or intimidating a debtor or using false and misleading approaches. B) contacting third parties about the payment of the debt without court authorization. C) seeking a court order for wage garnishment to satisfy a legal judgment. D) contacting a debtor at his place of employment if the employer objects.

Answer 70

The answer is seeking a court order for wage garnishment to satisfy a legal judgment. A state court may issue an order for garnishment of a portion of a debtor's wages in order to satisfy a legal judgment that was obtained by a creditor. LO 6.2.2

Question 71

Landry Plumbing, Inc., filed for bankruptcy under the reorganization provisions of Chapter 11 of the Federal Bankruptcy Code. A plan of reorganization was confirmed, and a final decree closing the proceedings was entered. Which of the following statements is CORRECT? A) Landry Plumbing, Inc., will now be liquidated. B) Landry Plumbing, Inc., will have negotiated with all creditors, except as otherwise provided in the plan and applicable law. C) Landry Plumbing, Inc., will not be allowed to continue in the same business. D) A trustee will continue to operate the debtor's business.

Answer 71

The answer is Landry Plumbing, Inc., will have negotiated with all creditors, except as otherwise provided in the plan and applicable law. At the conclusion of Chapter 11 proceedings, a corporate debtor has negotiated with creditors for most of the debts of the business. Exceptions to negotiated debts include debts that are provided for in the plan of reorganization (approved by the creditors and the court) and certain nondischargeable debts. LO 6.2.2

Question 72

All of the following economic activities represent government fiscal policy except A) increasing marginal income tax rates. B) increase purchases of goods and services. C) reducing marginal income tax rates. D) cutting the discount rate.

Answer 72

The answer is cutting the discount rate. Reducing the discount rate is an example of monetary, not fiscal, policy. LO 6.1.2

Question 73

Which of the following statements regarding demand is CORRECT? Generally, the higher the price level, the lower the level of demand. The demand curve is usually represented as sloping upward from left to right. A) I only B) Both I and II C) II only D) Neither I nor II

Answer 73

The answer is I only. A higher price level usually results in a lower level of demand, which is represented by a downward-sloping curve from left to right. LO 6.1.1

Question 74

Which of these describes why changes in supply occur? Changes in the cost of inputs Changes in productivity Changes in technology Changes in taxes A) III only B) I and II C) II and III D) I, II, III, and IV

Answer 74

The answer is I, II, III, and IV. All of these affect the amount of supply. LO 6.1.1

Question 75

Which of the following best describes stagflation? A) Indicates a decline in the rate of inflation B) Occurs when inflation and unemployment rise and the general growth of the economy is slow as business output falls C) A decline in the general price level and is often caused by a reduction in the money supply and consumer demand D) Denotes an increase in the general level of prices

Answer 75

The answer is occurs when inflation and unemployment rise and the general growth of the economy is slow as business output falls. Stagflation occurred in the United States during the 1970s, when rapidly rising oil prices caused consumer prices to rise sharply and businesses to cut back production. LO 6.1.4

Question 76

Which of the following confirms the current state of the economy? A) Changes in investor sentiment B) Unemployment rate C) Orders for durable goods D) Housing starts

Answer 76

The answer is unemployment rate. The unemployment rate is a coincident indicator—it confirms the current state of the economy. The other choices are leading indicators—they indicate which direction the economy is heading. LO 6.1.3

Question 77

If the demand for an item changes greatly when its price changes, the item is considered A) inelastic. B) at equilibrium. C) elastic. D) disinflated.

Answer 77

The answer is elastic. Elastic goods are typically luxury items. The demand for these goods may change greatly when their prices change because they are not necessities. LO 6.1.1

Question 78

If the Consumer Price Index (CPI) is up and consumer demand is down, the economy is likely in which stage of the business cycle? A) Contraction to trough B) Recovery to trough C) Recovery to expansion D) Peak to contraction

Answer 78

The answer is peak to contraction. As prices trend upward and consumer demand decreases, the economy is moving from peak to contraction. As demand continues to decrease, assuming supply remains constant, downward pressure will be put on prices through the contraction to the trough. LO 6.1.3

Question 79

Under the bankruptcy laws, which of the following will NOT be discharged? Credit card debt used to pay college tuition (within the past three years) Taxes from four years ago in which the taxpayer purposely failed to report $10,000 of self-employment income Alimony A) II and III B) I, II and III C) I only D) I and II

Answer 79

The answer is II and III. Credit card debt may be discharged. Alimony or back taxes resulting from failure to report income cannot be discharged. LO 6.2.1

Question 80

The type of bankruptcy in which a person is freed from most debts in exchange for giving creditors assets that legally may be seized is called A) Chapter 7 bankruptcy. B) Chapter 9 bankruptcy. C) Chapter 11 bankruptcy. D) Chapter 13 bankruptcy.

Answer 80

The answer is Chapter 7 bankruptcy. Chapter 13 bankruptcy is one in which a plan is created for the debtor to repay outstanding debts within a specified time period. Frequently, the amount owed is reduced so that payments will be manageable. LO 6.2.1

Question 81

Which of these assets are generally exempt from creditor claims in a Chapter 7 bankruptcy? Disability income benefits Proceeds from any annuity contracts A) Both I and II B) Neither I nor II C) I only D) II only

Answer 81

The answer is both I and II. These assets are generally exempt from creditor claims in bankruptcy. A person's homestead, pension, and retirement plan rights (ERISA plans), proceeds from annuity contracts, and some limited amount of personal property are also exempt. LO 6.2.1

Question 82

Which of the following claims will NOT be discharged in bankruptcy? A) A claim that arises from alimony or maintenance other than a lump-sum property settlement B) A claim brought by a judgment creditor whose judgment resulted from the debtor's negligent operation of a motor vehicle C) All of these claims will be discharged D) A claim brought by a secured creditor that remains unsatisfied after the sale of the collateral

Answer 82

The answer is a claim that arises from alimony or maintenance other than a lump-sum property settlement. Debts arising from alimony, maintenance, and child support may not be discharged in bankruptcy court. This does not include lump-sum property settlement awards. LO 6.2.1