Economics Chapter 4 Study Guide Multiple Choice Identify the choice that best completes the statement or answers the question. ____ 1. The graph shows information about a particular installment loan. Suppose you decided to pay off this loan in 24 months instead of 60 months. What would happen to the monthly payment and to the total amount you would pay? a. monthly payment would increase; total payment would increase b. monthly payment would decrease; total payment would decrease c. monthly payment would decrease; total payment would increase d. monthly payment would increase; total payment would decrease $2,000 Installment Loan at 10% Interest Term of Loan 24 Months 48 Months Monthly Payments $92 $50 Total Interest $197 $415 Total Payment $2,197 $2,415 ____ 2. Based on the table, if you pay off this loan in 48 months instead of 24 months, how would your total interest change and by how much? a. Total interest would decrease by $218. b. Total interest would increase by $218. c. Total interest would decrease by $42. d. Total interest would increase by $42. ____ 3. Which picture shows a durable good? a. Product 1 c. Product 3 b. Product 2 d. Product 4 ____ 4. [We are] a full-service financial institution providing a wide variety of financial products and services.... [We have been] serving communications employees and their families for 65 years.... [Our] philosophy is...”people helping people.” For information about your company’s eligibility to offer...membership to employees, call [us]. This passage comes from what type of financial institution? a. commercial bank c. savings and loan association b. credit union d. savings bank ____ 5. A financial institution that is owned and operated by members to provide savings accounts and low interest loans is a a. savings and loan. c. commercial bank. b. credit union. d. savings bank. ____ 6. Which of the following is an example of a durable good? a. washing machine c. blouse b. hairbrush d. gasoline ____ 7. What is the purpose of a credit check? a. to find out a borrower’s creditworthiness b. to offer credit cards to first-time borrowers c. to pay back the borrower’s loan in full d. to inform borrowers of their legal rights ____ 8. A usury law a. restricts the amount of credit a financial institution can offer. b. sets maximum interest rates consumers can be charged. c. defines lending practices for state financial institutions. d. allocates credit based on need. ____ 9. Even when a person declares personal bankruptcy, he or she must continue to pay a. all creditors. c. taxes. b. credit card bills. d. ongoing court costs. $1,000 Credit Card Balance at 9% Interest Monthly Payment Time to Pay Off Total Interest Paid $15 7 years, 8 months $376 $30 3 years, 3 months $145 $45 2 Years, 1 month $89 $60 1 year, 6 months $63 *Minimum required payment is $15 per month. ____ 10. Based on the table, if you paid $45 instead of $15 each month on your credit card bill, how much would you reduce the total interest you would have to pay? a. $313 c. $82 b. $287 d. $89 ____ 11. Based on the table, how long would it take you to pay off your $1,000 credit card balance if you make the minimum required payment each month? a. 7 years, 8 months c. 2 years, 1 month b. 3 years, 3 months d. 1 year, 6 months ____ 12. If the coming holidays will be supercharge season for your credit cards, it’s more important than ever to know when payments are due. Card issuers have hair triggers when it comes to assessing late fees, so if your check arrives even one day late, you’ll probably be slapped with a $29 penalty. . . . Fortunately, you may now get some breathing room. When Citibank recently acquired 13 million Universal card accounts, it declared that payments would never be due on holidays or weekends. Source: Kiplinger’s Personal Finance Magazine, November 2000. Suppose you use a credit card that is not from Citibank. Your next payment is due on January 1, the New Year’s holiday. Based on the passage, you will likely be charged a late fee unless you mail your payment a. early enough to arrive within the grace period after January 1. b. anytime before January 1. c. on January 1. d. early enough to arrive before January 1. ____ 13. Sec. 1691. - Scope of prohibition (a) Activities constituting discrimination It shall be unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction - (1) on the basis of race, color, religion, national origin, sex or marital status, or age (provided the applicant has the capacity to contract); (2) because all or part of the applicant's income derives from any public assistance program; or (3) because the applicant has in good faith exercised any right under this chapter. Source: Title 15, Chapter 41, Subchapter IV, Sec. 1691. Accessed at Legal Information Institute, Cornell University. This passage comes from what federal consumer credit law? a. Truth in Lending Act c. Equal Credit Opportunity Act b. Fair Credit Reporting Act d. Fair Credit Billing Act ____ 14. After individuals declare personal bankruptcy, a. they have no trouble reestablishing their credit. b. they can keep most of what they own. c. all of their creditors will be paid off. d. the bankruptcy proceedings stay on their credit record for 10 years. ____ 15. What is the main factor lenders consider in determining a person’s creditworthiness? a. finance charges c. character b. cash available d. credit rating ____ 16. Which type of financial institution controls the largest amount of funds and offers the widest range of services? a. savings bank c. savings and loan association b. commercial bank d. credit union ____ 17. What do you have to pay when you borrow funds? a. principal plus collateral c. the amount you borrowed b. principal plus interest d. twice the amount of the loan ____ 18. Credit cards such as Visa and MasterCard are issued by a. banks. c. credit card companies. b. finance companies. d. mortgage companies. ____ 19. Credit Card Charge of $400 at 10% Interest Amount Charged $400.00 $400.00 Interest at 10% $40.00 $40.00 Annual Membership Fee none $10.00 APR 10% ? What percentage should appear in place of the question mark in the illustration? a. 10% c. 12.5% b. 2.5% d. 20% ____ 20. Method for Computing Finance Charge at XYZ Bank No finance charge is applied if full payment is received within 25 days after the date of the last billing statement. If full payment is not received, then a finance charge for the unpaid amount is added to the next month’s bill. What method of computing the finance charge does this passage describe? a. previous balance c. average daily balance b. adjusted balance d. past due balance Matching Using Key Terms Match each item with the correct statement below. a. credit card f. interest b. commercial bank g. credit bureau c. charge account h. secured loan d. credit i. collateral e. mortgage j. bankruptcy ____ 21. amount of money a borrower must pay for the use of someone else’s money ____ 22. receipt of money to buy goods or services in the present with the promise to pay for them in the future ____ 23. device that allows a person to make purchases without paying cash ____ 24. bank whose main functions are to accept deposits, lend money, and transfer funds among banks, individuals, and businesses ____ 25. private business that investigates a person to determine the risk involved in lending money to that person ____ 26. something of value that a borrower lets the lender claim if a loan is not repaid ____ 27. installment debt owed on houses, buildings, or land ____ 28. the state of legally having been declared unable to pay off debts owed with available income ____ 29. credit that allows a consumer to buy goods and services from a particular company and pay later ____ 30. loan backed up by collateral Using Key Terms Match each item with the correct statement below. a. usury law f. installment debt b. finance charge g. finance company c. durable goods h. mortgage d. annual percentage rate i. unsecured loan e. interest j. collateral ____ 31. installment debt owed on houses, buildings, or land ____ 32. something of value used to secure a loan ____ 33. financial institution that takes over contracts for installment debts from retailers and receives a fee for collecting the debt ____ 34. cost of credit expressed monthly in dollars and cents ____ 35. a law restricting the amount of interest that can be charged for credit ____ 36. amount of money a borrower must pay for the use of someone else's money ____ 37. cost of credit expressed as a yearly percentage ____ 38. loan guaranteed only by a promise to repay it ____ 39. manufactured items intended to last more than three years ____ 40. type of loan that is repaid in equal payments over a fixed period of time Short Answer Use complete sentences to answer 41. In one sentence, describe the trend depicted in this graph. “Some [credit] cards will give students teaser interest rates of about 5%, which last about six months. After the time is up, the rate could jump to 19%... [Credit card] companies get ahead of the competition by offering benefits, such as frequent-flyer miles. The benefits [Visa offers] range from dining privileges to guaranteed airport parking to travel-accident insurance.” Adapted from Melissa Skopelja, “Student Finance: Catch-22, “ The Ball State Daily News (September 10, 2003). 42. Make a list of all the incentives mentioned in the passage that credit card companies use to attract customers. 43. Suppose you see an advertisement for a credit card that offers an annual percentage rate of 3 percent. Based on the excerpt, what else should you find out in order to determine if the card is a good deal? 44. What is the significance of the cloud in this cartoon? 45. Finding the Main Idea Why do many college students find themselves over their heads in credit card debt? 46. Understanding Cause and Effect Why do you think credit cards are more popular today than they were 40 years ago? APPLYING SKILLS Understanding Percentages Read the table then answer the following questions. Anual Percentage Credit Card Issuer Annual Fee Rate First National Bank No fee 9.5% Premium First $50 7.5% Federal Savings $35 10.0% Table 4-1 47. How much annual interest would Premium First charge you for a year on an unpaid balance of $3,500? 48. On an unpaid balance of $3,500, how much more interest would you pay per year if your credit card is issued by Federal Savings instead of Premium First? 49. For which kind of credit card user would First National Bank’s card make the most sense? 50. On an unpaid balance of $1,500, how much less interest would you pay per year if your credit card is issued by Premium First instead of First National Bank? 51. Why might you be willing to pay the high annual fee that Premium First charges? 52. Credit Card Charge of $400 at 10% Interest Amount Charged $400.00 $400.00 Interest at 10% $40.00 $40.00 Annual Membership Fee none $10.00 APR 10% ? Find the question mark in this illustration. Describe in words, not numbers, how you would compute the percentage that should replace the question mark. 53. Making Comparisons What are the advantages and disadvantages of using debit and credit cards? 54. Debt is not itself a bad thing. Used properly, credit allows young families to buy their own homes and acquire other trappings of middle-class life without waiting until middle age. Homeownership, in turn, gives these families a stake in their communities and encourages them to take an active role in keeping it a good place to live. But easy credit—and plainly credit is very easy today—creates a temptation to push the envelope, to live at a higher level than the borrower can safely afford. The Washington Post, May 10, 1999. In one sentence, summarize the main idea of this passage. $2,000 Installment Loan at 10% Interest Term of Loan 24 Months 48 Months Monthly Payments $92 $50 Total Interest $197 $415 Total Payment $2,197 $2,415 55. Based on this table, describe in general how you would expect your monthly payments, total interest, and total payment to change if you were to pay off this loan in 12 months instead of 24 months.