Download Review Packet

Name: ________________________________
Ms. Dagro and Mr. Zogby
Date: _____________
Economics
Success!  Guide to the Financial Literacy Test
Directions: Take this class period to go through the material in this packet. Use your notes to
fill in the information. Whatever you do not finish in class, you must finish for homework.
Part I  Investment Review
More questions on investing…
1. What does NYSE stand for? What can people buy on the NYSE?
2. What does SEC stand for? What is the job of the SEC?
3. Why do people like to invest in bonds?
4. What influences the price of stocks?
5. What is liquidity?
6. What is another name for a stock?
*You should also know…
 Buying stock on margin means that you are borrowing money to buy them
 When you buy a US bond it is exempt from taxes!
 Bank Credit of Deposit, also known as a CD, is used for saving money for the future
– if you take your money out early, there is a penalty
 2 for 1 stock split = you can buy double the shares for half the price!
 For example: If McDonald’s stock is trading @ $80 per share and you own 100
shares when the company announces a “2 for 1” stock split, each share would be
worth $40 and you would own 200 shares.
Other Important Investment Tidbits
1. Rule of 72 – formula to determine how long it would take to double an investment. You
divide 72 by the given interest rate (or rate of return) to calculate this.
For example: If the interest rate is 6%, how many years will it take for $1,000 to grow to $2,000?
 Ans: 72/12 = ____________ years.
2. A treasury bill (T-bill) is a secure and low risk investment
3. EE Series Savings Bond = Series EE savings bonds, which are issued and backed by the U.S.
Treasury, are purchased for one-half of their face value. These bonds earn interest monthly and
they are exempt from state and local taxes.
4. Capital gains are profits made from the sale of capital assets such as stocks and bonds; one
must report the sale as income, and is subject to a capital gains tax. Capital assets that are held
over one year are considered long-term capital gains and are taxed at a lower tax rate or in some
cases are not taxed at all.
Use the word bank to fill in the blanks.
Uncollateralized loan
Fees
Credit cards
Consolidation loan
Minimum payment
ATM
Debit card
Bankruptcy
Open ended credit
Debt ratio
1. _________________ cards allow you to purchase items and the money is taken directly
out of your checking account.
2. _________________ cards allow you to purchase items and you receive a bill at the end
of the month for your charges. (You are borrowing money!)
3. If you do not use a (n) ____________ that is within your system, you will be charged a
fee for withdrawing money from your account.
4. If you file for ______________________, this action will remain on your record for 10
years!
5. A ___________________ is a loan that is not backed up by “collateral” or assets to cover
the loan amount (for example a car loan).
6. When you receive your credit card bill at the end of the month, you must pay at least the
___________________________.
7. A _____________________ combines several loans into one so that paying off your debt
becomes easier.
8. If you are late paying your credit card bill, you will be charged _________, based on the
interest rate.
9. A department store charge card is an example of ___________________________. This
means that there is no limit on the amount that you can charge.
10. The lower the ________________, the better a person is financially.
More questions on credit…
1. What are the dangers of using credit cards?
2. Places where you can buy a “cash card” are department stores, food restaurants, and gas
stations. What could be another name for “cash cards?”
3. Scenario: You have given your debit card to a friend because they need $25. When they
go to the ATM they take $100! Is there anything that you can do to get back your
money? Is so, what is it?
4. What are some strategies you can use if you find yourself with bad credit?
5. How long will bankruptcy appear on your record for?
*You should also know…
 Compound interest is the interest which is calculated also not only on the initial
principal but also the accumulated interest of prior periods; this is what you are
charged when you keep paying only the minimum payments
 Open ended credit is when there is no limit on how much credit you can obtain; the
American Express green card is a good example of this.
 An example of a collateralized loan is when you go to the pawn shop to sell your
personal items
 The Truth in Lending Act (TILA) of 1968 is a United States federal law designed to
protect consumers in credit transactions, by requiring clear disclosure of key terms of the
lending arrangement and all costs
Part III  Money and Banking Review
Define the following terms…
1. Monetary Policy: actions taken by the federal reserve to control the amount of
__________ in circulation
2. Federal Reserve: central bank of the ________________; it conducts monetary policy
and attempts to keep the economy stable.
3. Money: any asset that can be used for the exchange of _____________ and services.
4. Credit Union: Non- ______ financial institution owned by its members and actively
seeks to benefit them.
5. Safe deposit box: space one can rent in a ______________ to store important documents,
jewelry, and rare possessions.
6. Certified Check: form of payment in which the bank has formally verified that the
person has sufficient funds to cover the check
7. Interest Rate: price of money expressed as a _______________
8. Inflation Rate: annual rate at which prices throughout the economy _______________;
investors must take inflation into account because high inflation can wipe out returns on
your investments.
9. Time Value of Money: is the idea that a dollar is worth more today than in the ___________
Questions on Money and Banking…
1. What does the money supply consist of in the United States?
2. What are some examples of financial institutions?
3. What is a “greenback?”
4. What combination of letters and numbers should a person use to create the PIN?
*You should also know…
 If someone makes a deposit of $10,000 or more, this deposit must be reported to the US
Treasury
 Banks use deposits from its customers to make loans to others. For example:
1. Ms. Dagro deposits $1,000 in her savings account. The bank pays her 3% interest for
her money.
2. Mr. Zogby borrows $1,000 from the same bank. The bank charges him 7% interest for
the money.
3. The bank makes a profit of 4% (7%-3%) on the deal.
4. Ms. Dagro may withdraw her money at any time.
5. Most banks are member FDIC, which means individual deposits are insured up to
$250,000
 The date on your check is your proof of payment, so make sure you don’t forget to date
it!
 ATM’s can be used for electronic transfers; transferring money from one account to
another. If you do not use one associated with your bank, then you will incur a fee.
 A money order is financial instrument, issued by banks, post offices, and other places,
allowing the individual named on the order to receive a specified amount of cash on
demand. They are safe to send in the mail, but cost between $1.10 to $1.50
Part IV  Financial Planning Review
Match the term on the left to the phrase on the right…
Term
Phrase
1. FHA (Federal Housing Administration)
A. Optional retirement planning option
offered to employees by private businesses;
investment grows tax deferred.
2. 401(k)
B. This will change according to your wants
3. Budget
C. Retirement planning option that offers tax
free growth, and tax free withdrawal when
eligible; money can also be used by first
time home buyers
4. Variable Expense
D. Retirement planning option that offers tax
deferred growth; withdrawals are taxed
upon withdrawal.
5. Pension
E. In order to qualify for housing through this
organization, you must meet the income
guidelines
6. IRA
F. Post-retirement benefits that an employee
might receive from some employers.
7. Roth IRA
G. A plan for how income will be spent and
saved
8. Wills
H Legal documents that specifies to whom
one’s assets will be given to upon one’s death
Answer the following question.
1. What is the relationship between a person’s education and the amount of money that they
make?
Complete
the chart on
next page
using the
information
above.
Analyzing the Job Offers…
(The first one has been done for you as an example)
$360 x 12
months =
$4320
$300 x 12
months =
$3600
Which offer would you take; one or two? Why?
Financial Planning Continued…
Directions: Complete the business cycle using the following terms:
 Trough
 Recession
 Expansion
 Peak

The business cycle:
Directions: Match the definition to the term.
Term
ANS
Definition
Taking it a step
further…
1. Depression
A. A general decline in prices, often
caused by a reduction in the supply
of money or credit
From 1929-1942 the
US experienced its
most severe one.
2. Recession
B. The reoccurring and fluctuating
levels of economic activity that an
economy experiences over a long
period of time
Occur somewhat
regularly in modern
economies; results in
job losses.
3. Business Cycle
C. A severe and prolonged
recession characterized by
inefficient economic productivity,
high unemployment and falling
price levels
This is the nature of
capitalism; there are
good times and bad
times.
4. Inflation
D. The phase of the business cycle
when the economy moves from a
trough to a peak
Benefits people who
borrow money; hurts
people on fixed
incomes or who
invest in assets with
fixed interest rates.
5. Deflation
E. A significant decline in the
economy, lasting longer than a few
months
Benefits people who
lend money; hurts
people who borrow
money.
6. Expansion
F. The rate at which the general
level of prices for goods and
services is rising and purchasing
power decreases
When people talk
about economic
growth, this is taking
place.
Part V  Taxes
*You should know…
 The types of taxes
o Federal tax
o State tax
o Local Tax
o Excise Tax
o Property Tax
 If you hold onto your investments for over a year, you will be taxed less
 A defined contribution pension plan is a company retirement plan, such as a 401(k) plan
or 403(b) plan, in which the employee elects to defer some amount of his/her salary into
the plan and will collect money contributed plus interest earned upon retirement.
Part VI  Insurance Review
Define the following terms…
1. Homeowners Insurance: Purchased to protect one’s residence and its associated
financial risks (damage to personal property, injuries to others, etc.)
2. Floater Policy: Additional coverage one can buy to cover expensive items (jewelry, flat
screen TV’s, etc)
3. Deductibles: amount that insured is responsible to pay toward damages
4. Cash Value Clause: Insurance that gives the policy holder a settlement based on the
value of the damaged or stolen items minus depreciation (loss of value of an item as it
gets older)
5. Replacement Value: policy holder receives full cost of replacing an item. Depreciation
is not considered.
*You should also know…
 Term life insurance is perhaps the simplest form of life insurance. It was developed to
provide temporary life insurance protection on a limited budget. Since term insurance can
be purchased in large amounts for a relatively small initial premium, it is well suited for
providing life insurance protection during the child-raising years.
 Liability Insurance is insurance protects you from being held responsible for another
party’s losses; for example when you own a store or an automobile you should have this
 Money collected by insurance companies through deductibles goes to paying damages
 The higher the deductable, the lower the premium
 Insurance premiums are based on risk factors and probability
 Auto insurance premiums are based on factors such as age, gender, martial status,
make and model of vehicle, state and city in which the vehicle is registered, and
driving record
Ways one can lower one’s auto insurance premium:
A) Increase_______________ for Collision
B) Cancel Collision Coverage after the car is paid off
C) Take the ___________________________________ Course every 3 years to receive
10% off your insurance premium
D) Shop around: Auto insurance is a _______________ industry