1. How might some of the federal government’s recent efforts to help stimulate economic growth affect consumers?
2. Where is the United States in the economic cycle now, and where does it seem to be heading? List some indicators that suggest in which direction it may move.
3. What are some common mistakes that people make in personal finance? Which three might be the worst, and why?
4. Describe some economic circumstances that might persuade the Federal Reserve to lower short-term interest rates.
5. People regularly make decisions in personal finance that have opportunity costs. List three financial decisions you have made recently, and identify the opportunity cost for each.
SOLUTION
1. Answers will vary depending on the student’s own financial situation. Tax cuts may help students in the lower tax brackets. Efforts to revive the economy will help students keep or obtain jobs. Education related credits will help college students. Efforts to help people buy their first home will help students who might be so interested.
2. The economy is in a period of slow growth at the time this edition was published. The gross domestic product is edging up and inflation is low. Interest rates are low but credit is not so easy to obtain for persons with a poor credit history. The unemployment rate is declining slightly.. Many people are concerned that many of the newly created jobs are low wage or part-time.
3. Eleven mistakes that people make in personal finance are failing to (1) engage in long-term personal financial planning, (2) engage in long-term budgeting, (3) engage in short-term budgeting, (4) establish a cash reserve in case of emergencies, (5) save at a rate that is sufficiently high, (6) establish adequate insurance protection, (7) manage income tax liabilities advantageously, (8) limit credit card debt, (9) manage expenditures so as to prevent unexpected expenditures on a credit card, (10) engage in investment planning, and (11) engage in retirement and estate planning. All eleven mistakes are important. The three most important mistakes are having too much credit card debt, saving at a rate that is too low, and inadequate retirement and estate planning. Too much credit card debt can literally cause bankruptcy. At the very least, you pay high finance charges on past purchases. This means that you can’t pay cash for current purchases and a vicious circle of debt ensues. Americans generally save at a rate that is very low. If you save just 1 percent more of your pay, you will reap a high return at retirement. Also, if you withdraw money from your tax-sheltered retirement plan before retirement, you will have a substantial shortfall when it comes time to retire.
4. This is a potential “Do It In Class” exercise related to page 14 in the text. The Federal Reserve Board might be persuaded to lower interest rates if the economy is in a downturn, a trough or even in the early stages of a recovery. The goal would be to make borrowing easier and provide a boost to the economy.
5. Students examples of decisions in personal finance that have opportunity costs will vary. Each should focus not on the direct cost of the decision but the lost opportunity that resulted from making the decision.