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Economics and Personal Finance- Module 1-160

Terms in this set (784)

The study of how individuals and societies make choices under the condition of scarcity.

The condition that exists when there are not enough resources to satisfy all of the competing uses.

Labor or human resources, land or natural resources, capital resources, and entrepreneurship, or the willingness to risk starting a business undertaking and skill to make the business successful.

Four categories of resources

The physical and mental capabilities of individuals used in the production of goods and services.

Labor or human resources

Includes all types of natural resources—physical land, timber, water, oil, minerals, and plants.

Land or natural resources

Includes equipment, machines, tools, and infrastructure. Examples of capital include factories, computers, copy machines, forklifts, heavy equipment, and trucks.

Capital resources

The willingness to risk starting a business plus the imagination and ability to make the business successful.

Entrepreneurship

Equipment, structures, and tools used in the production of goods and services.

The study of how individuals, households, and businesses make choices. Micro is derived from the Greek word for small. Microeconomics focuses on the behavior of the units—individuals, households, and businesses—in an economy.

The study of the economy as a whole. Macro is derived from the Greek word for large. Macroeconomics doesn't focus on the behavior of any single firm or household; rather, it examines the aggregate or total behavior.

A simplified representation, such as a graph, of an economic environment.

Quantity that can assume different values.

Graphs involving one variable affecting another value.

One variable graphs

A circular graph divided into slices, where each slice represents a percentage.

Rectangles proportional to the values they represent.

Illustrates how the value of a variable changes over time. (like a line graph)

Time series graph

The point at which the intersects the vertical axis.

Vertical intercept

One variable increases, the other one increases.

Positive relationship

As one variable increases the other one decreases.

Negative relationship

The value of the next best alternative other than the choice that was made.

Opportunity Cost

When you give up something to gain something else.

Helps people choose among various options. PACED (Problem, alternative, criteria, evaluate alternative, decisions)

PACED decision Model

Shows the maximum combination of two goods that can be produced when using all the available resources and the best technologies.

Production possibilities curve

Linked directly to a product or service, such as the raw materials or labor required to produce the product or service. Direct materials and direct labor are the most common direct costs.

Affect an entire operation rather than a specific product or service. Utilities, depreciation, office supplies, and rent are examples of indirect costs. Usually, such costs are called overhead.

Unexpected results. Occurs when an individual makes a decision without knowing the full consequences. This is not uncertainty, they are different.

Unintended consequences

Occurs when an action has unexpected benefits. "the invisible hand?" coined by Smith references this term.

positive unintended consequence

Occurs when an action causes unexpected harm or has unexpected costs.

negative unintended consequence

The father of modern economics, and in 1776, he published an economics book called the Wealth of Nations.

Expected consequences

Intended consequences

Doing a little more or less of something.

Marginal decisions

The additional benefit resulting from an action.

Marginal benefit

The additional cost resulting from an action.

Income generated by the sale of goods and services.

Total cost / number of units produced.

The traditional economy, the command economy, the market economy, and the mixed economy.

Four major types of economic systems

1) What should I produce? 2) How should I produce it? 3) Who will buy the goods or services?

Three basic economic questions

An economy in which the kind of work people do, the goods people produce, and the way the people use and exchange goods is all followed by tradition and custom.

Traditional Economy

Individuals and firms can determine what they want to produce, how much they want to produce, and who will receive the goods and services produced.

The government makes all or most of the economic decisions. These governments say their choices are not driven by self-interest but are oriented toward improving the well-being of their citizens.

Command Economy

Measures the value of all the goods and services that a country produces during a specific year. Often used to measure standard of living.

Gross Domestic Product (GDP)

An overall increase in the price level

Combines characteristics of both a market economy and a command economy. The markets play the major role in economic development. Governments do not tell individuals and firms directly to produce certain goods and services, but they impose some limitations to guide production and to protect consumers and workers from unfair treatment.

The act of buyers and sellers freely engaging in market transactions.

Voluntary exchange / transaction

A thing or idea used to encourage or discourage people form making certain decisions in a certain way.

Individuals are allowed to own property and use it in any legal way they see fit.

Private ownership

The increase in GDP per capita over time.

Economic growth

Occurs when an individual, business, or country focuses on producing a few goods or services to trade for other goods and services.

Tangible objects that an individual may want or need.

Action people value.

The social science that studies the a) production, b) distribution, and c) consumption of goods and services.

How goods and services are generated.

A step in the production process where goods and services are transferred to those who use them.

Place or product distribution

The process by which people use goods or services to satisfy their wants and needs.

The other hand, is the study of the economy as a whole. It includes national, regional, or global economies. As opposed to studying specific decision-making factors, macroeconomics examines total output, total employment, total income, aggregate expenditures, and general price levels to analyze various economic problems.

The study of how individuals, households, and businesses make choices about the production, allocation, and consumption of scarce resources. In particular, it focuses on how an individual or firm makes a decision given limited resources.

The economic system of the major trading nations during the 16th, 17th, and 18th centuries, based on the premise that national wealth and power are best served by increasing exports and collecting precious metals in return.

The book written by Smith in reaction to mercantilism and excessive government control of markets.that effectively established economics as a discipline.

The Wealth of Nations

Refers to man-made goods, such as tools, machines, and buildings.

Physical capital

Refers to the skills and knowledge a person has acquired through experience and/or education.

Funds used to buy or rent tangible assets.

Financial capital

The difference between what you pay for an investment and how much you sell it for.

Commonly used metaphor to describe the self-regulating nature of the marketplace. Smith claimed that by pursuing their own interests, individuals frequently provide unintentional benefits to society more effectively than when they try to do so intentionally.

Refers to the specialization of work based on specific activities

Division of labor

The willingness and ability to acquire specific quantities of human resources at various wages in a specific time period, all other things being equal.

Entrepreneur's demand for scarce factors of production used by businesses, such as natural resources, human resources, and capital resources.

The amount of hours workers are willing to work at a given wage.

The cost of the physical capital used in production divided by the number of units produced.

Unit cost of capital

A demand for one thing based on the demand for another.

Market-determined selling price

How people use their limited resources to make purposeful choices.

Consumer demand

Factors that affect a business from the outside.

Exogenous factors

Goods that help produce other goods, and are used over and over for that purpose, rather than incorporated into the products.

A measure of how much a worker can produce in a given amount of time, usually helped by a machine or piece of equipment.

The demand for physical capital.

The availability and willingness of factors to supply their labor or their tools or their raw materials to a business at various prices.

Refer to anything that makes work more productive.

Capital resource

A person's market value based on how experienced and employable they are.

Products used to make other goods as well as make production easier, faster, better, or more efficient.

The amount charged or paid for the use of money.

The federal government allows an inventor or developer to exclude all others from making, using, or selling his or her invention. The government will grant a patent if the innovation is judged to be new and useful, not an obvious variation of an existing product. Often, a patent has a specific time limit.

Factors other then the price of the good or the service that influence supply and demand.

A thing or idea that is used to encourage or discourage people form making certain decisions.

The willingness and ability to bring to market (produce and/or sell) specific amounts of a good or service at different prices in a specific time period, considering all things remain the same.

The willingness and ability to buy specific quantities of a good or service.

It demonstrates how inputs can be combined to produce outputs. It is the mix among three factors of production (natural, human, and capital resources) and the resulting output. It refers to producing the greatest quantity of a product with the available factors of production and current technology.

Production function

States that by adding units of one resource, such as labor, there will be a point where adding additional units of that resource will add less to the output—or even reduce the total output.

Law of Diminishing Returns

It explains how much production is possible if only one factor of production is increased or decreased, while the other factors remain the same.

The short run of the production function

It explains the amount of any resource can be increased or decreased, which changes the production function. It is a period of time long enough for a company to adjust its outputs based on every variable it can manipulate.

The long run of the production function

The total quantity produced for each level of labor.

It can be expressed mathematically as the total product divided by the number of laborers, which is the average amount produced by a single laborer:

Average product/ "labor productivity."

The extra output or additional product produced by hiring another unit of labor.

marginal product

The measure of the total product divided by the total inputs or, in this case, the number of laborers.

Total productivity

In microeconomics, the long run is the time period in which there are no fixed factors of production that change the output level. In the short run, some factors are fixed and entry or exit from an industry is constrained.

In macroeconomics, the long run is a time period when the general price level, contractual wage rates, and expectations adjust fully to the state of the economy—in contrast to the short run, when these may not fully adjust.

Micro and macro, long and short runs

Apparent Diminishing Returns

The people or group of people that live together and make economic decisions for private use.

Firms are business entities such as partnerships, corporations, and limited liability companies.

A market for the factors of production where they are bought and sold.

Refers to the market where products are sold.

Refers to households purchasing and selling goods and services for their own use.

Consumer Market

Consumers analyze their choices based on their expected income and determine the best combination of goods they can afford.

Maximise satisfaction

The advantage, or fulfillment, a person obtains from consuming a good or service.

Economists divide these choices into two main categories: (1) consuming goods and services and (2) earning income.

Maximizing satisfaction choices

An item that measures the value of exchanged goods and services in a commercial transaction.

Medium of exchange

Consumers are the ultimate decision-makers because firms try to fulfill their demand.

Consumer sovereignty.

The study of firms and market structure.

Industrial organization

Goods or services are received for equivalent goods or services.

It shows that sellers are willing to part with a good or service in exchange for a set price

Exchanges made where both parties do not participate willingly or do not stand to gain from the exchange.

Involuntary exchanges

When trades and exchanges occur across international borders. It is important because of its effect on nations' overall economic activities.

International trade

When a country sells to another country.

When a country buys from another country.

When a nation imports more goods and services than it exports.

When a nation exports more goods and services than it imports.

Dependency is when a country's economy is directly impacted by the development and expansion of another country's economy. Economic dependency is risky, particularly when it reduces food security.

Dependency Theory

The relationship between two or more economies.

Interdependence

The ability of a country, person, or company to produce 1) more of a good or service with the same amount of resources. 2) the same amount of a good or service with fewer resources.

Absolute advantage

The ability of a country, person, or company to produce a certain good at a lower relative opportunity cost than its trading partners.

Comparative advantage

Compared to the next best thing (ex. relative cost of 5 corn is 3 tomatoes)

An unincorporated business owned by a lone individual. The sole proprietor pays taxes on the business through his or her personal tax returns. 73% of all U.S. businesses are this.

Independence—the owner alone is responsible for all aspects of the business.
Efficiency in decision-making (no board of directors or stockholders involved).
Tax reporting to the IRS is relatively simple and inexpensive.
Minor children of the sole proprietor may be hired without paying payroll taxes, and, if the child earns $5000 or less, he or she pays no income taxes.
Healthcare reimbursement arrangements (HRAs), also known as IRC Section 105(b) plan, are available to the employees, spouses, and families of sole proprietors. This loophole in the tax laws allows an employer plan to reimburse employees for medical costs, including medical and dental insurance, deductibles, copayments, and other healthcare expenses.
If a home office is used, a portion of office expenses, property taxes, utilities, and vehicle expenses may be tax deductible.
The owner keeps all the profits.
The letters THE IHO could be the first letters of words representing benefits of sole proprietorships:

T Taxes
H Healthcare
E Efficiency
I Independence
HO Home office

Costs

The owner has limited ways to raise capital. Potential investors in the business cannot buy stock (there is no stock), making investment difficult to define and document.
The owner has unlimited liability and can lose personal assets along with business assets. If there are employees, their mistakes may create liabilities for the business. On the other hand, a small unincorporated business has more creditworthiness than an incorporated business of similar size since the owner's personal assets will be added to those of the company for the purposes of assessing credit. Lenders are aware, however, that business owners can shift assets back and forth between personal property and the sole proprietorship. Therefore, lenders may require the owner to guarantee the loan personally, which means he or she must put up personal property as loan collateral.
There is greater difficulty in attracting skilled employees to a smaller business. Potential employees usually prefer larger companies that tend to be more stable and may offer greater benefits.

Sole proprietorship

A business owned jointly by two or more people.
Three types: General partnerships, limited partnerships and joint ventures.

Partnerships are relatively easy and inexpensive to form.
Owners share commitment, decision-making, profits, and responsibilities; however, each partner can contribute a unique set of skills and expertise to the success of the business.
The incentive of becoming a partnership may attract highly motivated and qualified employees.
The tax advantage of a partnership over a corporation is that the owners are taxed only once—on their personal tax returns.
As with sole proprietorships, business decisions can be made efficiently, without involving shareholders, officers, and directors.
Laws concerning partnerships vary among states; however, the Uniform Partnership Act has been adopted in every state except Louisiana, which means partnership laws are generally uniform across the country.
Acquisition of capital can be easier in a partnership than in a corporation since individuals often receive better loan terms. Banks perceive loans to individuals to be less risky since personal assets can be used to secure a loan. In addition, limited partnerships allow investors to avoid the personal liabilities of general partners.
Costs

Owners face unlimited liabilities, not only for their own actions but also for the actions of their partners.
There is no "chain of command" in decision-making, which creates the potential for conflicts among partners.
By law, a partnership is dissolved whenever any partner retires, resigns (known as withdrawing), or dies. However, this situation can be avoided by drawing up a partnership agreement that stipulates how a business can continue if a partner retires, withdraws, or dies.
According to the Uniform Partnership Act, the existence of a partnership is dependent upon the owners. Ownership (partnership) cannot be transferred unless all other owners agree.

An organization owned and operated by people who use its services; they are designated as members, or user-owners.

Benefits

Members receive reduced costs for products and/or services due to the economy of scale provided by the co-op. In addition, if there is an excess of funds at year's end, the money may be distributed to the members.
The members cannot incur personal liabilities from the actions of the co-op.
The democratic operation of the co-op allows all members to have an equal vote regarding how the business is run.
For certain types of co-ops, funding opportunities may exist through government-sponsored grants.
For an incorporated co-op, the taxation status is similar to a limited liability company (LLC) because surplus earnings are not taxed. Members pay taxes on any surplus distributions they receive.
Costs

Because of the democratic nature of the co-op structure, everyone likely will not be happy with all decisions made by the group and the decision-making process may be slow.
It can be difficult to attract large investments since every member's vote carries equal weight regardless of the size of each member's investment.

A relationship between the owner of a trademark, service mark, trade name, or advertising symbol and an individual or group (the franchisee) that wants to use this identity as part of a business.

Benefits

The franchise may provide the resources (e.g., financing assistance, training, marketing, and management expertise) necessary to assure the franchisee's success.
The franchisee has exclusive rights to operate the business within a defined area.
Costs

The price of the franchise may be very high.
There is very limited flexibility on how to run the business.

A cross between the limited liability feature of a corporation and the taxation and operational features of a partnership.

Benefits

Liability for business losses or actions of the LLC do not apply to the personal assets of individual members of the LLC. Exceptions apply, such as tort actions by employees due to accidents. Tort is any wrongdoing not involving breach of contract for which a legal action for damages may be filed.
Perhaps the most significant benefit is the minimal amount of start-up expense and recordkeeping required.
There are few restrictions on profit sharing in contrast to partnerships, where profits must be evenly distributed.
Taxation is "passed-through" to individual members' returns, rather than the double taxation of C corporations, where both the corporation and shareholders are taxed.

Costs

The lifetime of an LLC may be limited to the participation of the original members. In many states, this means the business disbands when a member leaves the LLC; however, it may be possible to prevent dissolution by creating an operating agreement that provides for the departure of a member.
The entire net income of an LLC is subject to Medicare and Social Security taxes.

Limited liability company

Designated based on Subchapter S of Chapter 1 of the Internal Revenue Code. Filing as an S corp allows a business to avoid double taxation—once on the corporation profits and again on the shareholders.

Benefits

Lower taxation of the business owner is a significant feature of the S Corporation. The shareholder, who also is an employee, pays taxes on wages but also receives a dividend from the corporation for his stock, which is usually taxed at a lower rate. The corporation itself is not taxed because they "pass through" to the owners' income taxes.
The shareholders/employees can write off business expenses.
The shareholders are protected from liabilities incurred by the corporation.
Since up to 100 shareholders are permitted, there are more opportunities to raise capital.
Accounting rules can be simpler, compared to C corporations.
Costs

S corps are required to operate under strict processes, such as holding board of directors' and shareholders' meetings and keeping detailed records—similar to the demands on C corporations.
Compensation requirements include a careful accounting for the wages and distributions of shareholder employees. A shareholder is required to receive reasonable compensation for services rendered to the corporation, even if the corporation is not making a profit.
Shareholders will be taxed for income the corporation makes, even if they do not receive any of that income. Also, an S corporation can issue only one class of stock.

According to the IRS, there are four characteristics that define a corporation: limited liability in terms of personal assets, continuity of life, centralization of management, and the ability to transfer ownership interests. If you wish to have more than two of these characteristics, you will have to incorporate your business and operate as a corporation.

Benefits

C corporations can raise capital by selling shares of the business to prospective shareholders in exchange for money, property, or both. The initial sale of stock is often done when the business "goes public" through an initial public offering, known as an IPO. To justify the expense of setting up and registering a corporation, the business should have enough income or potential income to reap the benefits of a large entity. Such benefits could include the following: 1) capital to make large-scale investments; 2) qualifying for bank loans and lines of credit; and 3) achieving economies of scale through large purchases.
Limited liability. Corporations have limited liability, in that individual employees (including management) or shareholders are not personally liable for the actions or indebtedness of the corporation.
Corporate tax treatment. Corporations usually pay lower taxes, and only on the profits of the corporation. In addition, these taxes are completely separate from the taxes paid by individual owners of the corporation. Individuals would, however, pay personal taxes on bonuses, salaries, and dividends received from the corporation.
Not only is partial ownership attractive to employees, it also motivates employees to make the company successful. Another attraction—though not necessarily unique to C corporations—is employee benefits, such as health insurance and retirement plans, which are tax-deductible expenses for the corporation while adding to the employees' compensation.
The corporation has a "perpetual existence," compared with employees or shareholders who may leave the corporation.

Costs

Corporations are double-taxed; profits are taxed at the corporate level and again when distributed to shareholders as dividends.
Corporations are more expensive to establish and operate.
Complex regulations consume many resources in terms of business accounting, environmental regulations, taxation, employer-employee relations, etc.
The corporation is accountable to stockholders. Annual meetings are required, and major changes in the corporate structure or dividend policies require stockholder approval by vote.

Taxation, profitability, liability, ownership

Factors of a business organization

In business, retail, and accounting, a cost is the value of money that has been used to produce something—afterward, this money is not available for use anymore. Generally speaking, a benefit is something of value or usefulness. In economics, a cost is an alternative that is given up as a result of a decision. In economics, a benefit is a quantifiable amount of money, such as revenue, net cash flow, or net income.

Cost and benefits differences in different fields

Refers to the cost advantages that an enterprise obtains due to expansion.

Economies of scale

Characterized by:
private ownership of resources, which provides incentives for owners to weigh the merits of using these resources in the present or conserving them for future use
competition among businesses, which tends to lower prices and raise quality
prices determined in the marketplace through supply and demand
consumer sovereignty, the concept that consumers' "dollar votes" tell businesses what they should produce
profit motive, an incentive for businesses to produce what consumers demand in an efficient manner—keeping costs down—in hopes of earning greater profit
limited government that acts as a referee—protecting consumers, workers, the environment, and competition in the marketplace

Market economies

This describes a rivalry in which two or more individuals or entities strive for a similar goal. In business, the goal is profitability.

Individuals who take calculated risks, bring resources together, develop new products, and start new businesses. They recognize opportunities, such as working for themselves. Entrepreneurs accept risks in organizing resources because they expect to earn a profit.

This encompasses assets in the form of money or property that are available for the entrepreneur to use. The entrepreneur attempts to use capital more efficiently than the competition in order to make better goods or services less expensively.

An economic model of price determination in a market.

The law of supply and demand

The rights to use one's possessions in any way they choose within the legal limits.

Property rights

Occurs when the market forces of supply and demand do not lead to an outcome society desires.

Federal Trade Commission

Perfect competition, monopolistic competition, oligopoly, and monopoly.

Four types of business competition in decreasing order

An economic model that describes a hypothetical market form in which no producer or consumer has the market power to influence prices. It involves many competitors that can enter or exit the industry with relative ease. (offers the same products.)

Perfect competition

a large number of firms with similar products that are differentiated by consumers. Consumers may distinguish between products based on features that are real or simply the result of advertising.

Monopolistic competition

Characterized by few companies because there is an extremely large capital investment required to enter the industry. A firm in an oligopoly could have the same products (e.g., aluminum or steel) or differentiated products (e.g., automobiles or soft drinks) as its competitors. Oligopolies have more control over pricing, but with few firms each knows what all the others charge for their products and must compete with them.

A business has no real competition. Monopolies are legal in the U.S. when acquired through superior skill and foresight but not legal if formed by collusion.

It is where supply meets demand either in prices or on a chart.

equilibrium point and price

Firms make a secret agreement to control a market.

Strengths, weaknesses, opportunities, threats

An area in the market where a business feels it can compete successfully and make a profit.

Based upon the right to own private property, which means people may use their possessions as they choose within the limits of the law. A business operation established by private individuals for profit.

Private enterprise

Part of the economy that is privately run.

Part of the economy that is run by the local, state, or national governments.

Units of a company.

An organized and regulated financial market.

Making fortunate discoveries by accident.

A business decides how much to sell and produce to make a maximum profit.

Profit maximization

Amount of money spent on the inputs used in the production process.

The amount of money that consumers pay for a good (like the lemonade) or a service (such as babysitting) in the market.

The income generated by the sale of goods and services.

The difference between the total revenue generated from production of a good or service and the total cost of production of that good.

The sum of the cost of the resources used to make a product.

Cost of production

The value of an asset when it is fully depreciated, when it is no longer considered usable.

The revenue that was gained from the sale of one more unit of a good.

Marginal revenue

The cost of producing one more unit of the good.

The average amount of money that is gained from selling each unit of a product.

Average revenue

The average amount of money spent on producing each unit of the product.

Cost that is already incurred in the production process and cannot be recovered.

They remain fixed no matter how many units of goods or services you produce. For example, if you rented scissors, trimmers, and other equipment from your friend at $10 per day to provide haircuts, this would be a fixed cost.

Costs that change with the quantity of production of the good or service. For example, the cost of shampoo will change based on the number of customers who have you wash their hair.

Profits that do not account for opportunity cost in their calculation are called accounting profits.

Accounting profits

The financial gain from an investment that includes opportunity cost.

Economic profit

It looks at the costs and profits of an existing business venture. This analysis helps a business find ways to increase revenue and maximize profits.

Cost and profit analysis

It looks at a potential or proposed project to see if it is practical or if it could potentially yield higher benefits compared to costs.

Cost-benefit analysis

The relationship between buyers and sellers.

Market structure

Companies that must accept the prices determined by the market.

Main characteristics of a perfectly competitive market:
1) A product sold by multiple firms is essentially the same. 2) There are enough businesses and consumers in the market so that none can individually influence the market. 3) There are few or no barriers for businesses entering the market. 4) Each firm is a price taker, meaning that the price they charge is determined by the market. 5) Consumers and firms have perfect information, meaning that they are aware of all other products and firms in the market.

Perfectly competitive market

Goods that compete against each other with little or no differences in product.

Homogenous goods

Consumers know all the products being sold in the market and all the prices.

Perfect information

Shows how resources, goods, services, and money move around an economy. It demonstrates how the world's economy functions, how money changes hands, and how money can transition from being one person's expense to another person's income.

Circular flow model

Money escapes from the circular flow of the economy. An example is savings.

Money that is added to the circular flow of the economy. An example is investments.

An intergovernmental organization seeking to promote international economic cooperation.

International Monetary Fund

Something that is burrowed and expected to be payed back with interest.

Quantity demanded relates price and quantity when all other factors are equal and demand is the amount of a good or service someone is willing and able to buy at different prices in a specific time period.

The difference between quantity demanded and demand

The economic price for which a good or service is offered in the marketplace.

Refers to a change along a curve.

Occurs when the quantity demanded changes even though price remains the same.

Shift in a demand curve

States that as the price of a good or service decreases, quantity demanded of that good or service increases.

Factors that determine changes in individual demand and market demand. Income, tastes/ preferences are determinants, prices of related goods and services, consumer expectation, and number of buyers.

Determinants of demand

An increase in demand as the income of an individual or economy increases.

An decrease in demand as the income of an individual or economy increases.

Goods that may replace each other in terms of consumption.

Substitute goods

Products that depend on each other in such a way that an increase demand of one product will cause a decrease in demand of the other product.

Complimentary goods

Supply is the varying amounts of a good or service that producers are willing and able to release on the market at different prices in a particular time period.

The number of goods or services the company releases at a given price when all other variables remain the same.

Quantity supplied

Everything else being equal, as the price of a good or service increases, the quantity supplied of that good or service also increases.

The supply of all the individual producers in the market.

Factors other than price—that can cause a shift in supply.

Determinants of supply

Resource prices, conditions of production, price of related goods, producers expectations, and number of suppliers.

The main determinants of Supply

Quantity supplied of a good or service is greater than the quantity demanded.

Quantity demanded of a good or service is greater than the quantity supplied.

The price at which quantity supplied equals quantity demanded.

Equilibrium price

The quantity at the intersection point of quantity supplied and quantity demanded.

Equilibrium quantity

The lowest price at which a good or service can be purchased. To protect businesses and workers from prices and wages dropping too low. They are also used to promote the development of important products or technologies. (above the equilibrium)

The highest allowed price for a good or service. Used to protect consumers from high prices. (below the equilibrium)

Refers to the response of consumers and suppliers to changes in price (responsiveness to change).It describes how much buyers and sellers change demand when price changes. It is equal to the percentage change in quantity divided by the percentage change in price. Price elasticity of demand (PED); whereas for producers it is reflected by the price elasticity of supply (PES).

Not very responsive to change in price.

The ratio of the percentage change in quantity to the percentage change in price.

Price elasticity of demand

The degree of the producers' reaction to a price change. If supply is elastic, the quantity supplied can be increased without an increase in costs or in the time required for the production of the good.
(PES = % Change in Quantity Supplied / % Change in Price)

Price elasticity of supply

The availability of one or more substitute goods, necessity or luxury good, time, portion of income, brand loyalty, and payer (ex. gift cards).

Factors that determine elasticity of demand

Excess capacity (ex. Machines not in use), factor substitution (interchange production resources), length of production process (The longer it takes to produce a good the less elastic it is).

Factors that determine elasticity of supply

Consumers are not very responsive to price changes.

Demand inelasticity

elasticity < 1 Inelastic; changes in price cause little or no changes in the quantity demanded
elasticity = 1 Unit Elastic; Changes in price create equal changes in quantity demanded
elasticity > 1 Elastic; The quantity demanded is very sensitive to price changes
elasticity = 0 Perfectly inelastic; price changes have no impact on the quantity demanded
elasticity = ∞ Perfectly elastic; the price remains the same at all quantities demanded

Determining elasticity for both supply and demand

An increase in price typically increases the revenue from a good.

The Price effect

An increase in price tends to decrease quantity demanded, whereas a decrease in price typically increases the quantity demanded.

The Quantity effect

Elasticity Description Price Change Quantity Change Total Revenue Change

E = 0 Perfectly Inelastic Increase Constant Increases
E < 1 Inelastic Increase Small change Increase
E = 1 Unit Elastic Increase Decrease Constant
E > 1 Elastic Increase Decrease Decreases

Elasticity chart

The difference between a buyer's willingness to pay and the market price.

Consumer surplus

Reflects the inverse relationship that exists between a good's price and its quantity.

Market demand curve

How much the consumer values the good, the consumer's income, and the existence of substitutes.

Factors that affect consumer surplus

Consumer choice

The combination of a budget constraint and consumer preferences.

A consumer who equally prefers two different products.

A set of product bundles that a consumer can purchase with a limited budget.

Budget constraint

The collection of goods or services a consumer chooses.

Consumption bundle

About consumers' likes and dislikes. It also helps explain how a consumer ranks any two consumption bundles.

Consumer preference

All bundles that are equally preferred with the same degree of satisfaction. Properties: (Indifference curves cannot cross one another and always slope downward.)

Indifference curve

A set of indifference curves with different degrees of satisfaction on the same graph.

Indifference map

Slope = −(PB/PC)

Calculating slope in a budget constraint graph

Positive rewards that encourage a behavior or they can be negative penalties that discourage a behavior.

A reward or other enticement that encourages a specific type of behavior.

Positive incentive

A penalty that discourages a certain type of behavior.

Negative incentive

An increase in the value of an incentive when it is sold at a higher price.

A scenario in which the free market does not provide necessary goods and services—such as clean air, police protection, and highways.

Market failures

Legal agreement enforceable by law.

Obligations based on law and are accompanied by possible punishments (such as fines). For example, you have a liability to follow the rules of a legal contract you have signed.

Liability rules

(ex. when they pay for ten gallons of gas, they are getting exactly ten gallons. This promotes fairness between buyers and sellers.)

Weights and measures

When a third party receives an unwarranted cost.

Negative externality

A free benefit to a third party.

Positive externality

A benefit or cost of a business transaction that affects a third party.

Cost to all involved parties, is sometimes greater than the private cost.

The cost of producing a good or service, without considering any of the external costs.

Grants of money that lower the cost of a good or service to account for social benefit.

Goods that are non- excludable and not rival.

Public goods "pure public goods"

Goods that are excludable and rival.

Goods that are excludable, but not rival.

Club goods "local public goods"

Goods that are non-excludable, but rival.

Common-pool resources "common public goods"

Rival (ex. if one consumer is using a hammer another consumer can't user the same hammer) or non-rival and excludable or non-excludable (ex. pay to use a good).

Classifying of goods

When non-payers receive free goods or services.

Free-rider problem.

Taxes that support programs such as Social Security and Medicare.

Most federal government spending goes toward:

social programs, including Medicare, Medicaid, and Social Security (55%)
national defense (20%)
interest payments on the national debt (6%)

Most state and local government revenues come from sales taxes, federal government grants, state personal income taxes, and property taxes. Most state and local government revenues go toward:

public education
public welfare
road construction and repair
public safety

Occurs when someone in the market knows more than others in the market. For instance, a cereal manufacturer may know the nutritional value of its product, but the consumers do not.

Asymmetric information

Laws in the United States are passed by Congress, a state legislature, or local governments and can be enforced directly by courts. Regulations are written by regulatory agencies and are also referred to as administrative law. Federal regulations are compiled in the Code of Federal Regulations (CFR).

The difference between a regulation and a law?

Refers to legislation passed by Congress.

A type of regulation that specifies the method that needs to be used. (ex. Instead of allowing flexibility, a government agency could adopt a regulation requiring all coal-burning power plants to install scrubbers.)

Technology-based standard

A type of standard that sets target outcomes that firms must achieve)

Performance-based standard

Type of behavior by a government over its citizens that resembles an overbearing parent.

When the cost of solving a market failure is greater than the benefits.

Government failure

The combination of two or more companies, whether through the creation of a new entity or by one concern absorbing another.

A form of intellectual property that consists of a set of exclusive rights granted by a sovereign state to an inventor for a limited period of time in exchange for the public disclosure of an invention.

Basic goods produced to satisfy consumer wants.

A written and signed promise to pay a certain amount of money on a certain date or with certain conditions.

Monopolistic groups of corporations that work together to reduce competition and control prices throughout a business or an industry.

Refers to a variety of government actions intended to promote competition and to break up firms that may have too much market power to set prices.

When two companies that make competing products—for instance, two car companies—merge to enjoy greater economies of scale or gain more market power.

Horizontal mergers

A merger between companies that do business with each another but do not compete with each other.

Vertical mergers

When the businesses have little in common—for instance, an electronics company merging with a cable television provider.

Conglomerate mergers

A bundle of legal rights that protects intellectual property.

(ex. Social Security and Medicare)

Social programs

Safety-net programs

high-income families pay a higher percentage then low-income families.

Progressive tax

Low-income families pay a higher percentage then high-income families.

High-income and low-income families pay the same percentage of their income on a tax.

Proportional tax

Other government social programs attempt to redistribute income from wealthier to poorer families.

Income redistribution

Programs such as Medicare and Social Security that have eligibility requirements.

Unemployment benefits

Three main sources: personal income taxes, corporate income taxes, and payroll taxes.

Federal income tax revenue

Three main sources: sales taxes, excise taxes (taxes on goods or services deemed non-essential), and property taxes.

State and local income tax revenue

This means that if your taxable income was under $8,500, you would pay 10% of your taxable income in taxes. If your income was between $8,500 and $34,500, you would pay 10% of your income up to $8,500 in taxes and then 15% of your taxable income over $8,500. Here is how this works.

Calculating income taxes

Include the right to (1) exclude others from using a good or service, (2) transfer its ownership, or (3) control its use by others. For example, property rights allow Carlos to keep others from using his video game or to sell or lend his game to others.

Property rights

Real estate, houses, and land represent one kind of property. These types of property are fixed geographically in one place; they are not mobile.

It is mobile; you can move the items from one location to another—ranging from video games to airplanes.

Personal property

Includes products of people's creative and intellectual thinking.

Intellectual property

Spells out all the terms of the agreement; an example is a deed to a house or a rental agreement for an apartment.

Expressly written contract

Occurs when you buy a product and agree to pay the full price listed for it.

Implicitly agreed upon contract

The result and actions of courts and government agencies to ensure the terms of contracts are met.

Contract enforcement

The holding of responsibility for something. To be liable often involves paying the party that has been affected by what you are responsible for.

Rules that provide a means for victims to be paid for damages.

Liability rules

Protect certain kinds of commercial intellectual property. Under trademarks, any name, word, symbol, sound, or color that signifies a specific product receives property rights protection

Protect works of authorship. Intellectual properties like songs, music, books, movies, and video games are works of art that can all be protected by copyright. Copyright are protected for 70 years after the owners death.

Regarded as protected intellectual property. For instance, Coca-Cola is allowed to protect its manufacturing process and complete recipe.

Protect intellectual property related to inventions and innovations.

Cost advantage that an enterprise obtains due to expansion.

Economies of scale

Laws that protect consumers

Consumer protection laws

The central banking system of the United States. It conducts monetary policy, which influences consumer spending, employment, and prices.

The Truth in Lending Act (1968) requires credit lenders to disclose borrowing terms and to use the same methods to determine the costs of borrowing. It also limits the liability to the cardholder in case a credit card is lost, stolen, or used without the cardholder's permission.
The Fair Credit Report Act (1970) requires accurate information in credit reports and ensures that consumers have the right to know and to correct this information.
The Equal Credit Opportunity Act (1974) prohibits discrimination on the basis of characteristics, including race, color, religion, national origin, gender, marital status, and age, in matters involving credit.
The Fair Credit and Charge Card Disclosure Act (1988) states that credit card companies must disclose their lending terms, such as annual fees and interest rates.
The Credit CARD Act (2009) increases consumer protections, such as not allowing credit card companies to increase rates on an individual's existing balances. This act also requires a 45-day advance notice before increasing interest rates on new purchases.

Federal Reserve

promotes fair-lending practices, protects privacy, informs the public about consumer rights, encourages honest advertising, and prevents fraud (attempts to deceive). It can even investigate and potentially sue companies and people that violate regulations.

Bureau of Consumer Protection

Someone takes your personal information.

Issues safety standards for food and medicine. The FDA regulates the safety of food, human and veterinary medicines, makeup, vitamins, and other products.

Food and Drug Administration (FDA)

The right to satisfaction of basic needs: to have access to basic, essential goods and services: adequate food, clothing, shelter, health care, education, public utilities, water, and sanitation.

The right to redress: to receive a fair settlement of just claims, including compensation for misrepresentation, poor quality goods or unsatisfactory services.

The right to consumer education: to acquire knowledge and skills needed to make informed, confident choices about goods and services, while being aware of basic consumer rights and responsibilities and how to act on them.

The right to a healthy environment: to live and work in an environment which is non-threatening to the well-being of present and future generations.

United Nations Guidelines for Consumer Protection stated:

Most credit card agreements allow 30 or 60 days to contest an incorrect charge. They also require you to notify the credit card company immediately if your card is lost or stolen, because someone may be using it to commit fraud.

Identity theft reporting

Protecting oneself against fraud and identity theft.

Consumer vigilance

The three credit bureaus—Equifax, Experian, or TransUnion gather information about a person and sell it to creditors, employers, and others. (not necessarily bad)

Bait and switch occurs when a business advertises one product at a low price (the "bait"). This gets consumers to visit the store. Then, once in the store, the consumer is told that the advertised product is sold out, and encouraged to buy a more expensive product (the "switch").

Occurs when a company alerts customers and asks them to return a defective product. The company may repair the defect, or they may refund the consumers who bought it.

Intended to protect competition in the marketplace.

Anti-competitive conduct

Another example of anti-competitive conduct. This occurs when a company sets its prices at a low level to hurt a competitor or force it out of business.

Predatory pricing

One type of anti-competitive conduct, is an agreement among competitors to establish prices.

Occurs when limited competition results in higher prices.

Prohibits mergers (combining of two or more companies) or acquisitions (purchases of other companies) that significantly reduce competition.

Clayton Antitrust Act

Prohibits a company from using its market power to damage or drive out competitors.

Sherman Antitrust Act

Financial products

Known as the Fed—helps protect consumers by regulating financial transactions, such as credit card purchases, electronic fund transfers through banks, ATM transfers, and mortgages.

Federal Reserve System

Monitors financial transactions to protect investors. To help maintain fair financial markets, it investigates fraud and other violations of securities laws.

Securities and Exchange Commission (SEC)

Protects the health of consumers by monitoring the safety of drugs, biological products, medical devices, food, cosmetics, and any products that might contain or give off radiation.

The Food and Drug Administration (FDA)

Monitors all issues involving automobile and truck safety.

The National Highway Traffic Safety Administration

Its mission is to monitor the quality of working conditions. It also helps protect retirement and health care benefits, vacation, and sick leave.

It includes:
The Occupational Safety and Health Administration (OSHA) monitors issues of workplace safety and health, such as the following:
Handling hazardous materials (flammable liquids)
Wearing personal protective gear (safety glasses and hard hats)
Enforcing environmental controls (sanitation)
Providing medical/first aid/fire protection (sprinkler systems and fire alarms)

The Employee Benefits Security Administration (EBSA) monitors workers' health care and retirement plans as well as many other benefits.

The Office of Disability Employment Policy (ODEP) ensures that people with disabilities and special needs have full opportunity in the work force.

The Mine Safety and Health Administration (MSHA) works to ensure safe and healthful workplaces for the nation's miners.

The Women's Bureau of the Department of Labor administers policies to monitor the interests of women in the workforce. It promotes equality and security for women workers and aims to empower women to have economic security.

Department of Labor

Enforces laws involving job discrimination based on race, color, religion, sex, national origin, age, or disability. It also enforces laws to protect people who complain about discrimination from further retaliation from their employers.

Equal Employment Opportunity Commission (EEOC)

Single firm, no close substitutes, price setting, barriers to entry such as high capital, resource control, and legal barriers.

Monopoly characteristics

A group of firms that colludes to set the market price.

When one party has exclusive control over an industry with the benefit of having the most efficient production.

Natural monopolies

When a handful of major producers supply a product, which can be standardized or produced with only minor differences. Characteristics: The companies are price makers, Barriers to entry, Limited price makers, similar products, few firms.

A method of how an individual can take into account not only the costs and benefits of their own choices but also how these costs and benefits might change when another person or persons makes a choice that impacts them.

A type of chart that shows all possible moves in a situation (or game) and their outcomes (revenue) in millions of dollars.

Business cycles

Consumer Price Index

Policies that are designed to influence spending, such as:

changing the level of taxes
altering the level of government spending

Fiscal policies

Policy that aims to regulate the money supply and interest rates, is carried out under the direction of the Board of Governors of the Federal Reserve System such as:

altering the amount of money circulating in the economy
adjusting a key interest rate that the Fed controls directly
changing deposit requirements of commercial banks

Monetary policies

Economic Growth: The overall output of goods and services increases over time.
Full Employment: All eligible people who want to work can find employment at current wage rates.
Price Stability: This means there is no inflation, where the general level of prices increases, or deflation, where the general level of prices decreases. Price stability provides a favorable economic climate for consumers and businesses.

Three main national economic goals

Workers may find it difficult to find a job, and the unemployment rate can soar.

All eligible people who want to work can find employment at current wage rates.

Full employment

GDP measures the growth rate of a nation's economy by adding the total value of all goods and services produced in a given year.

Gross domestic product (GDP)

To calculate net exports, economists subtract the total number of a nation's imports from its exports.

Total value of all goods and services produced in a country.

A period of economic growth. The highest point is called the peak.

Less spending. The lowest point in the cycle is called the trough.

If the government spends more money than it collects in taxes during any given year.

economic indicators are the following:

unemployment
gross domestic product (GDP)
inflation

Economic indicators of the strength of the economy

Total number of people employed or seeking work.

The time lag between when people decide to work and begin working.

Frictional unemployment

Occurs when people lose their jobs because the economy grows at a slow pace.

Cyclical unemployment

Happens when a worker's skills no longer match the job.

Structural unemployment

Occurs during certain times of the year. Sometimes, more or fewer workers are needed

Seasonal unemployment

The percent of the labor force that is unemployed.

Unemployment rate

An increase in real GDP.

Economic growth

A measure of the average prices paid by the average urban American household. The CPI includes the prices of housing, food, clothing, transportation, and other commonly purchased goods and services. When the CPI rises, the average American household has to pay more for these goods and services.

Consumer Price Index (CPI)

The percentage change in the price index from the preceding period. Here is the formula to calculate an inflation rate:

[ (Current Year's Price Level - Previous Year's Price Level)/Previous Year's Price Level ] × 100%
= Inflation Rate

A measure of average income within a country. (Remember: GDP is a measure of production, not sales.)

Determined by evaluating the production of goods and services at current prices. An increase in nominal GDP could be caused by an increase in production and/or an increase in prices.

Goods that are purchased for resale or goods that will be used to produce other goods. (ex. Hammer, or paint brush and paint.)

Intermediate goods

A good purchased for final use. (ex. When you purchase a hamburger at a fast food restaurant, you are purchasing a final good, even though the cost of the hamburger reflects a lot of intermediate goods, including flour.)

Financial transactions, such as the purchase and sale of stocks or bonds are not included in GDP. Remember, GDP is a measure of production. Financial transactions are simply transfers of assets and do not represent new production.
Illegal transactions are not included in GDP.
Unpaid activities, such as volunteer work, are not included in GDP. Although volunteer services can be very important, they are not included in GDP. The same is true for the services provided by a stay-at-home mother.
Government transfer payments, such as Social Security payments and welfare, are not included in GDP. Because this money is being transferred from the government to individuals, it does not involve the production of goods or services, and as such, does not contribute to GDP.

Values not included in GDP

Exchanges of money between two of more parties.

Financial transactions

Expenditure approach (taken every year): GDP = Consumption + Investment + Government Spending + Net Exports

Methods to calculate GDP

Such as cars, washing machines, and TVs. Durable goods refer to products that are designed to last for a relatively long period of time.

Durable consumer goods

Such as food, fuel, cleaning supplies, and toothpaste. Nondurable refers to products that have a relatively short lifespan (three years or less).

Nondurable goods

Determined by evaluating the production of goods and services at constant prices.

Prices adjusted to reflect inflation. This identifies the changes in GDP caused only by increased production.

Constant prices

The total amount of a country's output (its gross domestic product or GDP) divided by the amount of labor needed to produce it.

Labor productivity

Measuring productivity across these different input categories—or factors of production.

Multi-factor productivity

For every added capital productivity increases less and less.

Diminishing returns

The branch of the economics field that investigate how to promote growth in the economics of developing countries.

Developmental economics

Used by the United Nations it measures the development of a particular country by calculating:
gross national income per capita
average life expectancy
the education index (based on the mean, or average, of years of schooling for 25-year-old adults and the expected years of schooling for children)

Human Development Index

Citizens in very low-income countries sometimes find themselves stuck in a perpetual state of poverty.

When a company moves its physical productions and/or services to another country.

When it uses labor from another company.

A market form that exists as a type of imperfect competition. A single buyer with multiple sellers.

A single buyer in the market that has multiple sellers.

age 16 or older;
do not have a job;
are available for work; and
have been job hunting for the past four weeks.

Characteristics of unemployment

People who have given up on seeking work.

Discouraged workers

Consists of people who are between jobs, or who have been offered employment but have not started working yet.

Frictional unemployment

There are times when a certain set of skills becomes obsolete, or are no longer marketable.

Structural unemployment

During any period of recession, there will be an increase in the unemployment rate.

Cyclical unemployment

There are times of the year when fewer people are demanded in some types of work.

Seasonal unemployment

The same amount of money buys fewer goods than in the past.

Purchasing power

The average percentage of prices that increase over a specified time, such as one year.

Anticipated inflation.

Expected inflation

Unanticipated inflation.

Unexpected inflation

A rapidly increasing inflation rate.

Hyper inflation

A list of typical goods and services that are frequently bought by urban households.

Calculated based on the selling prices that the producers receive for a basket of goods.

Producer Price Index (PPI)

Reference year used to compare price changes across multiple years.

An adjustment that accounts for inflation in computing the national income. The GDP deflator can be calculated as the ratio of a country's aggregate output at current market prices (nominal GDP) to its value at base year prices (real GDP). GDP deflator only deals with products and services made in the U.S.

Equation: (nominal GDP)
GDP deflator = ————————————— * 100
(real GDP)

People's standards of living can be harmed.

Loss of welfare

Is not a measure or economic growth, reviews about 80,000 items.

M1 includes the dollars and coins in circulation and also the money in different types of checking accounts.

M2 includes all the money M1 includes, but also includes the money in certain savings accounts.

Definitions of money

The number of times, on average, that a unit of money—for instance, a dollar—gets spent in one year.

Velocity of Money = Total Expenditures
—————————————————
Money Supply

Velocity of money

Output Velocity of Money = Nominal GDP
——————————————
Money Supply

Output velocity of money

Inflation (%) =
Growth rate of the money supply(%)
+ Growth rate of the output velocity of money (%)
− Growth rate of real GDP

Refers to the total demand for final goods and services demanded in an economy at a given time and price level.

Aggregate demand

Occurs when aggregate demand is greater than aggregate supply (or the total supply of goods and services that businesses plan to sell during a specific time period).

Demand-pull inflation

Decreases in aggregate supply when aggregate demand is greater.

Cost-push inflation

When a high inflation rate is reduced.

The amount of money a person borrows.

It is arbitrary because neither the lender nor the borrower knows in advance what will happen because the inflation is unanticipated.

Arbitrary redistribution of income

Shoe-leather costs (Going to the bank to take out small amounts), menu costs (businesses updating their pricing), money illusion (paying workers more, but still below the inflation rate), and avoiding deflation (holding on to money until prices drop).

Examples of anticipated inflation

Illustrates the relationship between demand and unemployment.

The Phillips Curve

If a contraction lasts for two consecutive quarters (half a year) or longer.

Expansion and growth in real GDP (I think).

A share of ownership in a corporation.

Periodic payments to stockholders.

The difference between the actual and potential output.

When a market's overall value increases for an extended period of time. An increase of more than 20% in a market index is generally considered a bull market.

Occurs when the market declines for an extended period of time. Investors lose confidence and invest less because they expect the economy to contract further. A decrease of more than 20% is considered a bear market.

Represents the total amount of goods and services demanded, which is usually denoted as the variable Y.

Shows the relationship between the overall price level (P) and national output (Y).

Aggregate demand curve

Shows the relationship between overall price level (P) and national output (Y) from the supply side.

Aggregate supply curve

Shows the price level and output.

Aggregate Supply/Aggregate Demand Model

Aggregate supply curve that represents the economy over a long period of time and is a vertical line.

Long-run aggregate supply curve

All demand at different price levels.

Aggregate demand curve.

Where the SAS curve and AD curve intersect.

Short-run equilibrium

The AD curve and long-run aggregate supply (LAS) curve intersect. {LAS represents the potential output level for the economy}

Long-run equilibrium

Countries aim to promote growth by increasing aggregate demand at each price level.

Expansionary policies

Countries aim to slow the economy's growth rate by decreasing aggregate demand at each price level.

Contractionary policies

Consumption spending (C)—this is personal consumption by consumers such as yourself. Consumption involves purchases of final goods and services, such as loaves of bread and haircuts.
Investment spending (I)—this is gross private domestic investment and involves spending on new capital goods and on additions to inventory. For example, firms build new factories and buy machinery. Firms might also add to their stock of goods that are in process or are finished. Residential construction is also included in investment.
Government spending (G)—this captures the government's consumption of goods and services, such as the postal service, roads, and textbooks for public schools.
Net exports (X − M)—this is the value of all goods and services that are sold to other countries (total exports) minus the value of all goods and services bought from other countries (total imports).

Four types of buyers' demands

Occur when a large number of people race to withdraw their deposits from a bank because they believe the bank will not be able to pay back the money to depositors.

It was created on December 23, 1913, during a time when the United States experienced several financial crises caused by multiple bank runs. It is made up of twelve regional federal reserve systems.

Federal Reserve System background

Responsibilities of the Federal Reserve System

Supervise and regulate banks within the country to promote reliability and confidence in the banking system.
Maintain stability in the financial markets by controlling the money supply (amount of money in the economy).
Ensure that all banks comply with the laws and regulations that apply to them.
Supply paper currency and coins to banks.
Process checks and electronic payments.

Responsibilities of the Federal Reserve System

It is composed of three parts: a) the Board of Governors, b) the regional reserve banks, and c) the Federal Open Market Committee that work independently from the government.

Composition of the Federal Reserve System

The seven governors appointed by the president to a 14 year term and a skilled staff formulate and execute the policies that make the banking system in the United States stronger and more reliable. In particular, the Board participates in the Federal Open Market Committee (FOMC), which controls the country's monetary policy. In addition, the Board oversees the activities of all twelve regional banks and approves the appointment of their presidents.

The Board of Governors

Roles of the 12 regional federal reserve systems.

Providing perspectives and expertise about their local economies. For example, they can inform the Board of Governors about potential employment and investment consequences of specific economic policies in their region.
Storing excess cash from local commercial banks.
Processing checks and electronic payments.
Conducting research on local and regional economies.

Each reserve bank also has its own board of directors with nine members in total; six of them, including the bank's chairman, represent the public. The remaining three members represent the banking industry. The reserve banks execute the regulations established by Congress and its Board of Governors.

The regional reserve banks

The FOMC is responsible for conducting the country's decisions concerning monetary policy.

The FOMC includes all members of the Board of Governors and the 12 presidents from the regional Federal Reserve Systems. However, only the seven members of the Board of Governors, the president of the Federal Reserve System of New York, and four other Reserve bank presidents vote on monetary policies.

The FOMC members meet approximately eight times a year to decide whether to change or continue the current monetary policies.

Federal Open Market Committee

Refers to the control of the country's money supply by the central bank for the purpose of promoting economic growth.

Monetary policy

The percent of the bank's funds that are held in its vaults, or on deposit at a Federal Reserve System.

Reserve requirement ratio (RRR)

When a bank needs to borrow money from another bank because at the end of the day the bank doesn't have enough funds for the reserve requirement ratio.

The interest rate that the Federal Reserve charges to commercial banks on overnight loans.

Federal funds rate

The interest rate charged by a Federal Reserve System to depository institutions, such as your local bank, to borrow short-term funds.

It consists of the purchase and sale of government bonds, which are an example of government debt issued by the U.S. Treasury Department. It is the principal monetary tool used by the Federal Reserve System.

Open market operation

An independent agency of the federal government. Its headquarters are located in Washington, D.C., but it conducts extensive business at six regional offices and two area offices. It is managed by a five-member board of directors appointed by the president of the United States and confirmed by the U.S. Senate. The FDIC insures only bank deposits, which include savings and checking accounts and certificates of deposits (savings certificates with fixed interest rates). Franklin D. Roosevelt help create the FDIC. Established in 1933. The Glass-Steagall Act established the FDIC

Federal Deposit Insurance Corporation (FDIC)

A loan or financial gift given to a financial institution or company on the verge of closing.

A government's policies that affect aggregate spending. (1) taxes, (2) transfer payments, and (3) government purchases.

Includes actions by the central bank that affect the country's money supply and the availability of credit.

Monetary policy

Includes payments received from employment, interest, profits, and transfers. The amount that can be spent after taxes.

Disposable income

A redistribution of income and wealth.

Transfer payment

Given to people who do not meet the typical requirements needed for most home loans. These borrowers might have a history of bad credit and, under normal circumstances, would be considered risky borrowers.

Income equals expenses.

Balanced budget

Income is less than expenses.

Income exceeds expenses.

The sum of all federal budget surpluses and deficits to date, meaning that it is the total amount of money the U.S. government still owes.

National debt "public debt"

An investment contract, or a loan to the federal government. The federal government sells securities to corporations, financial institutions, foreign governments, and individuals.

Treasury Bills—Also called T-bills, these short-term securities can reach full value in only a few days or possibly a year. (ex. you pay $60 for a $100 T-bill, a year later you exchange it for $100.)

Treasury Notes—Also called T-notes, these are slightly longer-term securities. As with T-bills, you pay less than face value, but it takes two, three, five, seven, or ten years for them to mature.

Treasury Bonds—These long-term securities take 30 years to mature.

Savings Bonds—Unlike Treasury bills, Treasury notes, and Treasury bonds, saving bonds are registered to a single person or group who are not allowed to resell them. After a certain time you cash them in.

Types of federal securities

Wars, economic downturns, and reduction of tax rates.

Major contributions to National Debt

Limiting money in the economy by raising fiscal or monetary economic characteristics.

Natural resources, location in the world (Who are the closest trading partners), labor force, and available capital.

Factors that effect a countries exports and imports

The cost of production, availability of raw materials and inputs, trade agreements among countries, prices of good and services produced at home, and the exchange rate.

Factors that can effect the quantity of exports and imports

Limits on the amount of a specific product that can be imported.

Restrictions that governments impose on trade.

Situation Net Exports GDP
Exports>Imports Positive Increases
Exports<Imports Negative Decreases

Understanding exports and imports on net GDP

A graph that shows the maximum combinations of two goods or services that can be produced in an economy when all the available resources are used efficiently.

Production possibilities curve

A country that does not trade outside its bounds.

A country that does trade outside its bounds.

Money used to make transactions.

A system that allows exchange rates to change frequently according to marketplace supply and demand.
When the dollar becomes more valuable compared to a particular foreign currency, it is said to have appreciated against that currency. When the dollar becomes less valuable compared to a particular foreign currency, it is said to have depreciated against that currency.

Floating exchange rate system

The U.S. dollar is appreciating compared to a specific group of foreign countries.

The U.S. dollar is depreciating compared to a specific group of foreign countries.

An action taken by the government or monetary authority with a fixed exchange rate system to set a downward adjustment.

Currency evaluation

An action taken by the government or monetary authority with a fixed exchange rate system to set an upward adjustment.

Currency revaluation

Medium of exchange (used to pay for goods and services), a unit of account (to measure the monetary value of objects in an economy), or a store of value (save your money over time until you need it).

The functions of money

A currency is worth more compared to others.

Support importers and exporters. (ex. The United States has removed or reduced tariffs and quotas on other countries if they agree to do the same for U.S. products.)

Free Trade Agreements

SMEs play a crucial role in job creation. Over the last two decades, SMEs have accounted for almost two-thirds of the new jobs in the United States.
About 250,000 U.S. SMEs directly export to one or more foreign markets. Yet, this represents only a small fraction of the total U.S. SMEs. U.S. SME exporters grow faster, increase employment faster, and pay higher wages than nonexporting SME firms.
U.S. SMEs play a larger role in the export economy than traditional trade statistics suggest because they also indirectly export products. SMEs export indirectly through wholesalers and by producing intermediate goods and services.
Direct and indirect exports by U.S. SMEs support about 4 million jobs and account for more than 40% of the total value of U.S. exports of goods and services.

Role of U.S. "small- and medium-sized enterprises" SMEs in exports and employment

Exchange rates that change freely based on market forces.

Floating exchange rates

A country chooses a specific exchange rate for each currency with which it trades.

Fixed exchange rate system

When the central bank wants to reduce the value of its currency, it is called devaluation; when it wants to increase the value of its currency, it is called revaluation.

Devaluation and revaluation

Full employment and price stability in a country.

Internal balance

Generally refers to trade deficits that are not too large to finance.

External balance

Tariffs, quotas, embargoes, and non-tariff barriers.

Types of trade barriers

Taxes placed on imported goods.

Limits on the quantity of goods that can be imported.

Limit imports of foreign-made products. (ex. require a license to sell something)

Non-tariff barriers

A non-tariff trade barrier that is an outright ban on imports from and/or exports to a particular foreign nation.

Grants of money that lower the cost of a good or service to account for social benefit.

Governments of different countries work together to set policies affecting trade. They agree to reduce or eliminate trade barriers, such as tariffs and quotas.

Free Trade Agreements (FTAs).

Increased trade among the United States, Canada, and Mexico. NAFTA makes imports from Mexico and Canada into the United States less expensive. Went into effect in January 1994

North American Free Trade Agreement (NAFTA)

Promoted increased trade across Europe and introduced a common currency: the euro. Economic and political partnership among 27 European countries. The EU works not only to encourage trade and investment, it promotes human rights and democracy, sets environmental policies, and has its own flag, making it far more than a trading bloc.

European Union (EU)

World Trade Organization (WTO) helps promote free trade worldwide. Its purpose is to reduce barriers to international trade and increase production efficiencies. Has 153 member countries throughout the world. While the WTO usually promotes free trade, there is one notable exception. If a business in an exporting country is found to be engaged in unfair trade practices, the WTO may punish that business.

World Trade Organization (WTO)

Decreasing prices dramatically in a foreign market to get rid of the competition. An unfair practice.

Refers to the close relationships and communications among national governments, corporations, and individuals on a worldwide scale.

Depending on on another.

Interdependence

Moves goods or people across oceans and seas.

Maritime transportation

Moves goods or people on airplanes.

Air transportation

Corporations with offices, factories, or other facilities in multiple countries.

Multinational corporations

MNCs face criticisms for their global business practices. Another issue with some MNCs is product safety standards. On the other hand, while multinational corporations often face criticisms, they frequently provide benefits.

Criticisms of multinational corporations

Salary is the regular compensation people receive for their work. Tips come from customers. Commission usually depends on sales and is based on a percentage of the sales price. Bonus is a reward paid to productive employees for meeting performance goals. Overtime is the extra pay employees can earn for working more than their regular hours. Piece rate is the price paid for the production of an object or good.

Types of earned income

Interest is money paid by banks and other financial institutions to people who deposit money in accounts. Returns on investments. Inheritance is the distribution of wealth among descendants. Gifts.

Types of unearned income

Compromises that effect the way people live.

Lifestyle trade-offs

Financial of beneficial perks included with the job such as paid leave and health insurance.

Learned abilities a worker needs to have in order to get the job done.

Workplace skills

Principals that are important to you.

Traits are characteristics that impact how a person acts or behaves every day.

Skills are the skills a worker must possess to get the job done.

Look for student discounts, use discounts online, use loyalty programs, pool resources with friends

Tips to paying less money

Get a credit card with a low borrowing limit and no annual fees.
Make sure that you know the terms. Know the interest rate charged on purchases and cash advances.
Keep a careful record of all expenditures. Make sure you know how much money you already owe.
Review all expenses every month to guard against identity theft.
Pay the full amount owed each month. Understand that finance charges are added on if the full balance is not paid on time. Credit card interest rates are very high—often 21% or more.

Using Credits Cards Responsibly

A three-digit number used by banks to assess your financial behavior.

Assessment of the financial trustworthiness of individuals or corporations/ businesses.

To have enough money to pay for living expenses indefinitely without needing a job.

Financially independent or independently wealthy

To be able to live independently and support oneself financially.

Financially self-reliant

Career planning, spending and savings planning (how much you will spend or save over a certain period of time), retirement planning (ex. 401(k) plan allows you to save money for retirement without the burden of income tax), and planning for debt.

Important types of planning

Be specific, state the estimated cost, realistic and attainable, and seta time limit.

Guidelines for Setting Financial Goals

Generally reached within one or two years.

Short-term goals

Can take five years or even a lifetime to achieve. A realistic long-term goal may be buying a house or having enough money for retirement.

Long-term goals

The economy begins to grow after a recession.

Defined by the National Bureau of Economic Research as "a period of falling economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

Criteria for a recession:
A recession has to last at least six months. The average period of time for a recession is 11 months
A recession is normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

People struggle to find a job and may take a job that pays less then what they earned.

Underemployment

The day the stock market crashed which began the Great Depression. (October 29, 1929)

Began in December 2007 and ended in June 2009. Partly caused by banks making unwise lending choices to buyers with bad credit.

Duration: 2007-2009

Main causes/ effects: lower lending standards, questionable investments by banks and investment firms

Government programs: The American Recovery and Reinvestment Act provided unemployment assistance, tax credits for first-time home buyers, and funds for building roads and other structures.

Recovery: Although the recession ended technically in 2009, a full recovery still had not occurred as late as 2012.

Great Recession

A type of mortgage that has higher interest rates.

Subprime mortgages

1929 to 1933. Unemployment was higher during the Great Depression than during the Great Recession.

Duration 1929-1933 (or later) 2007-2009

Main Causes/Effects:
widespread speculation across the economy

Government Programs: The U.S. government provided jobs for people to build roads and other
structures.

Recovery:
World War II created a surge in demand for workers and products. Although the recession ended technically in 2009, a full recovery still had not occurred as late as 2012.

Great Depression.

In 2009, Congress passed the estimated $787 billion American Recovery and Reinvestment Act (ARRA) of 2009, which provided unemployment insurance, tax credits for first-time home buyers, and funds to build and repair highways, railroads, and airports.

American Recovery and Reinvestment Act (ARRA) of 2009

The difference between the Great Depression and the Great Recession

Internal Revenue Service (IRS) issues the W-4 form. W-4 informs your employer about how much to withhold from your paycheck in order to ay for taxes to the state. In 2010, a person who earned $5,700 or less a year would not have to file a federal income tax return and would not need to have money withheld.

If you earn a paycheck, your employer will withhold, or keep, a percentage for taxes and then pay that amount to the federal and state governments.

The amount you earn before paying any income taxes.

Certain allowances on the income of a worker that are not taxed.

Can be achieved within one to two years.

Short-term goals

Often take two to five years to achieve. Will you need a car, payments for college, furniture for an apartment, or something else?

Intermediate-term goals

Take at least five years. Long-term goals include saving for retirement, buying a home, or starting a business.

Long-term goals

For-profit companies offer 401(k) plans. Nonprofit companies and organizations, as well as local and state government employers, offer 403(b) and 457(b) plans.

Employer-Sponsored Retirement Plans

A 401(k) Plan is a contribution plan where an employee can make contributions from his or her paycheck before taxes are taken out. The contributions go into a 401(k) account and are invested and managed by the 401(k) company, with the employee often choosing the types of investments based on options provided under the plan. In some plans, the employer also makes contributions—that is, the employer matches the employee's contributions up to a certain percentage.1

A retirement plan for certain employees of public schools and other educational institutions. It is also available to employees of certain tax-exempt organizations such as religious organizations.2

403(b) plan also known as a tax-sheltered annuity (TSA) plan

Available to state or local governments and to tax-exempt non-profit organizations. Employers or employees, through salary reductions, contribute up to a certain annual limit ($16,500 in 2011 and $17,000 for 2012) on behalf of participants under the plan.3

There are several types of IRAs for business owners and employees—simple, traditional, SEP, Roth, and others. ith the traditional IRA, you pay taxes on the money you contribute to the plan when you withdraw it. With a Roth IRA, you pay taxes on the money you save before you deposit it.

Individual Retirement Accounts (or IRAs) are personal retirement plans

An amount of money the government allows you to subtract from your taxable income.

A reduction in your taxes based on your expenses. Expenses can include your education fees or a home mortgage. People also are allowed deductions for each child they have.

To be summoned by the IRS to provide more information on your tax return.

Extra time to file your taxes.

Easiest tax for to file.

IRS Form 1040EZ

Local authorities use taxes to fund county and city police departments, fire departments, libraries, schools, and trash collection, among other things. These services exist because taxes pay for them.

Taxes collected at the state level pay for construction projects, such as building roads and bridges, and fund state agencies and institutions that keep you safe, such as the state police and state court system.

Federal taxes help fund large institutions, like the country's armed forces and wide-reaching entitlement programs, such as Social Security and Medicare.

Federal tax use

Income taxes, payroll taxes, estate taxes, corporate income taxes, excise taxes, fees and tariffs.

Federal revenue

Sales, estate, inheritance, excise, and income taxes.

Property tax and sales taxes.

A tax collected on a recently deceased person's assets (e.g., bank accounts, investments, property); however, these assets must be valued at a certain amount before the estate tax kicks in. This minimum amount changes periodically based on congressional legislation. For instance, in 2012, the minimum amount was $5.12 million; estates valued at less than this amount were not taxed.

Similar to a property tax. It is collected by states based on the value of the property the deceased person passed down to his or her heirs; the heirs must pay an inheritance tax based on the value of this property.

inheritance tax

Reports year end earnings.

Individually listed items that qualify for a tax reduction.

Itemized deductions.

Different from deductions. Deductions reduce the amount of your taxable income. Tax credits reduce the amount of taxes you owe. (Ex. of tax credits: Child and dependent expenses, foreign taxes, retirement, college education plans.)

(ex. medical expenses, state and local taxes, interest, donations, theft or loss.)

Reductions in taxes.

Reductions in taxes.

Required by nearly every state, is one of the most important kinds of car insurance. It covers damages caused to another vehicle if you are responsible for an accident

Property damage liability

Covers an injury to or the death of another person that results from an accident you caused. It covers the victim's medical expenses and can also pay for your legal defense costs, if needed.

Bodily injury liability insurance

Optional in most states. It covers your medical expenses—and those of any passengers in your vehicle—whether or not an accident was your fault.

Medical payment insurance

Coverage pays for damages if you are the victim of an accident caused by an uninsured driver. In a "hit and run" situation, you would need this coverage to pay for your medical expenses. Even though most states require proof of automobile insurance to register a vehicle, many drivers still do not carry it. In Virginia, registering a vehicle without insurance costs $500 a year. The purpose of this fee is to encourage motorists to insure their vehicles.

Uninsured motorist

Pays for damages to your car in case you are in an accident. When pricing collision insurance, consider the cost of your vehicle. There is no point in getting collision insurance that costs more than your car is worth.

Collision coverage

Pays for damages from theft, vandalism, acts of nature, fire, and collisions with animals. Many lenders require comprehensive coverage as part of a car loan. It also covers the cost of these damages to victims in case you cause an accident.

Comprehensive coverage

A higher education savings plan, typically sponsored by a state, designed to help families plan and invest for future college expenses.

Allows parents and students to prepay their cost of tuition and mandatory fees at Virginia's public colleges and universities (but benefits may be used at any qualified higher education institution).

Virginia Prepaid Education ProgramSM (VPEP)

A savings program that offers a selection of investment options to help pay for college costs.

Virginia Education Savings TrustSM (VEST)

Virginia Prepaid Education Program (VPEP)
State statutory guarantee—covers tuition and mandatory fees
at Virginia public colleges
May use at any eligible education institution (but the
guarantee does not apply)
Limited enrollment period (December 1—March 31)
Beneficiary age restrictions (birth through 9th grade)
Residency restrictions (either account owner or beneficiary
must be a VA resident)
May rollover into another 529 college savings program
Tax advantages: earnings grow tax free; no tax on qualified distributions; VA taxpayers—state income tax deduction

Prepaid program

Virginia Education Savings Trust (VEST)—multiple investment portfolio option
subject to investment risk
CollegeAmerica—multiple American Funds mutual fund investment options
subject to investment risk
CollegeWealth—FDIC insured bank savings accounts
guaranteed by the FDIC
All Three Savings Programs Offer:

Open year-round
No beneficiary age restrictions
No residency restrictions
May rollover into another 529 college savings program
May use for ANY qualified higher education expenses
Tax advantages: earnings grow tax free; no tax on qualified distributions; VA taxpayers—state income tax deduction

Savings program

Assets that are given as security to ensure repayment of a loan.

A lenders legal claim on a buyers private property until the loan is paid off.

The lender can take back property as the buyer does not keep up with mortgage payments.

Stop making your mortgage payments.

Based on interest rates that do not change as you repay the loan. If interest rates are low, it is to your advantage to choose a fixed-rate mortgage.

Fixed-rate mortgages

Varies, depending on the current interest rate—also known as the prime rate.

Adjustable-rate mortgage (ARM, for short)

A fee levied by the lender when you have a closing (when you sign the documents related to buying the house). The lender charges you these points for lending you its money. A point is 1% of the amount you borrow.

The money you have left over after paying for the essentials, such as food, clothing, utilities, insurance, and shelter.

Discretionary income

Helps organize and prioritize income made annually.

It is the total value of the person's assets, or possessions, minus the value of his or her liabilities, or debts.

Formula to show how long it will take for an investment to double in value. 72/ interest rate = number of years for investment to double. (It only estimates compound interest not simple.)

Shares in a corporation or company. When a person buys a share, he or she becomes a stockholder. As a stockholder, that person owns one small piece of the corporation and is entitled to a fraction of its profits.

Possessions that have economic value.

Assets that can be sold quickly for cash. (ex. cash, money in savings account, and personal possessions.)

Assets that cannot be turned into cash without paying a penalty. (ex. Certificates of deposits, retirement funds etc...)

Restricted assets

Assets that are not easily sold and slow to convert into cash. (ex. House, large machinery, business equipment.)

Financial obligations, or amounts of money you owe.

The money you deposit in the bank

Interest paid on only the principal. It is a fixed amount paid at regular intervals (usually monthly or annually). It is based solely on the principal in the account and not on any interest that has accumulated.

Simple interest

Also paid periodically; however, it is paid on the principal plus any previously earned interest.

Compound interest

Away of thinking about how money changes in value over time. Think of it this way: the value of a dollar is greater today than the value of any dollar you make in the future. (Money is worth more today then that same amount of money in the future. (Think investments.))

Time value of money

FV = PV(1 + r/n)^nt

Future value of money formula

What you paid for an asset.

Historical cost

What you pay to keep the asset working.

The loss of value of an asset.

What you would pay if you had to replace the asset right now.

Replacement cost

A note which promises payment when the note is redeemed.

Early form of money that is worth something in its own right instead of being a representation of financial value. (ex. If a coin is made of a precious metal, it is known as commodity money, and its "intrinsic value" is what that metal )

Commodity money

Worth of something in and of itself.

Intrinsic value

This money has value only because the government says it does. Fiat money has no intrinsic value in itself.

This system, known as the gold standard, meant that governments linked the value of their currency to the value of a specific amount of gold they held.

Manufacture money.

The primary purpose of most savings and loan companies (sometimes called S&Ls) is to provide financing so its customers can buy homes. While they offer other banking services, the majority of their business is in offering home mortgages and other loans. Sometimes savings accounts at S&Ls offer higher interest rates than savings accounts at other institutions.

Saving and loan companies

Credit unions are non-profit institutions and are owned by its members. Typically, people must belong to a qualifying organization, such as a specific organization like the American Consumer Council, or must live or work in a certain community in order to become members. Other types of qualifying organizations may include a common place of employment or a common place of worship.

Deposits made at credit unions are insured by the National Credit Union Administration (NCUA).

Banks are businesses that accept deposits and make loans with interest. Banks are owned by companies and operated to make a profit for the bank's owners or shareholders.

Banks/ online banks

Non-bank institution that provides check cashing services.

Check-cashing store

If you need a loan, it is much more expensive to use non-bank institutions.

Payday loan stores

Securities firms pair people and organizations that have money to invest with investors who need money to make their businesses grow.

The banking services you need on a day-to-day basis.

Personal banking

Savings and checking accounts

Types of bank accounts

You deposit money, and it earns interest. Your money is available whenever you want it, but the interest rates are low.

Traditional savings account, or passbook account

Require a greater minimum balance—the minimum amount of money you keep in the account—and they limit the number of transactions—deposits and withdrawals—you can do each month. But, in return, you receive a higher interest rate—your money earns more money.

Money market accounts

Work closely with customers to help them manage their money on a day-to-day basis.

Advise customers on long-term savings accounts (also called investments) and help people figure out ways to save money effectively.

Investment bankers

The interest rate.

Annual Percentage Yield, or APY.

Calculates how many years it will take to double your investment. (With a fixed annual rate.)

Refers to services that allow customers to access bank information, conduct financial transactions, make deposits and withdrawals, and pay bills electronically without visiting a bank.

Electronic banking (also known as e-banking, virtual banking, and online banking)

A federal law that improved the efficiency of handling electronic checks.

Check 21 Act1 (The Check Clearing Act )

ATM machines
Debit cards
Online banking
Electronic check conversion

Types of E-banking

A person who doesn't have a bank account.

Monthly records of what has happened to your bank account in terms of deposit, withdrawal, etc...

Bank statements

The process of matching your personal records to the bank's records.

Keep until your next statement.

Bills and receipts

Keep for one year.

Bank and credit card statements

Keep for six to seven years.

The transactions have not been completed.

Add the credit and subtract the debit in transit from your statement.

Important steps in reconciling your statement with the banks.

Used to pay for goods and services that cost a good deal of money and that continue to be useful even after the last payment has been made. For most consumers, this category includes health care, education, cars, businesses, and homes.

Money owed on something you will get a return on.

Money owed on something that has a higher cost per used value. (ex. Vacations)

Require buyers to make regular payments on their merchandise. They must pay the balance over a period of time. They get their merchandise only after paying the entire amount. The store keeps the buyers' money and merchandise until the full amount has been received. If buyers are unable to pay for the item or decide not to buy it, the store must return all the money but may charge a small restocking fee.

Requires you to put up a property guarantee.

Doesn't require you to put up a property guarantee. (For people with good a credit score)

Noninstallment credit is either secured or unsecured, depending on the company offering the credit. This credit does not have monthly payments. Instead, the bill is due in a lump-sum payment for the full amount owed. Noninstallment credit tends to be due in a short period of time, such as a month.

Noninstallment Credit

Installment closed-end credit allows the consumer to receive a certain amount of credit to purchase one item or a few goods. One type of installment closed-end credit is a car loan. The car company offers the consumer credit to buy the car. The credit does not extend beyond the sales price of the car. In addition, the person pays the credit in installments over a period of time instead of paying it back in one lump sum.

Installment Closed-End Credit

Revolving open-end credit allows for purchases to be charged up to an approved limit, which is different for everyone. A monthly minimum payment is required, but finance charges are calculated on unpaid balances. One example is a credit card.

Revolving Open-End Credit

The borrower's history of paying bills.

The ability to repay a loan.

Payments on insurance policies.

A credit rating is a persons trustworthiness while a credit score is determined by a persons credit history.

Credit score vs credit rating

If you do not pay the credit card company the full amount of your bill, the money you owe is the balance.

Carry a balance

This type of credit card does not charge an annual fee. The consumer pays all the charges on the bill (does not carry a balance) every month.

No fee/no balance credit card

The Annual Percentage Rate is a measure of the interest charged, expressed as a yearly rate. The APR takes into account the interest rate and the timing of the payments. Under Federal Truth in Lending laws, all lenders are required to disclose the APRs associated with an offer.

The credit line is the maximum amount of available credit a cardholder may access. The Consumer Federation of America suggests people carry credit lines no greater than 20% of their gross income.

Credit line (also referred to as credit limit)

To encourage you to use your card to make purchases, credit card companies may offer an incentive in the form of frequent airline flier miles, reward points, or cash back when you charge items on your card.

Promotional incentive

The account disclosure agreement describes the terms and conditions of your credit or debit card account. When you sign the application for a credit or a debit card, you are agreeing to accept all the interest rates, fees, incentives, and conditions described in the account disclosure agreement.

Account disclosure agreement

Character (borrowers reputation), capacity (ability to repay debt), capital (savings and other assets), conditions (Other circumstances that may make it easier, or harder, to obtain credit. One example of a condition is the economic outlook,), and collateral (assets, such as property, that a borrower can use to repay the lender.)

Factors that determine your credit worthiness

Experian, TransUnion, Equifax

Companies that track your credit

Impact your credit record. Hard inquiries are used by potential lenders—for example, when you apply for a credit card or when a bank considers you for a car loan. (checks or examinations made by a potential lender into your credit history.)

Do not impact your credit record. These occur when someone requests your history—for example, when a landlord investigates your creditworthiness, or when a company tries to confirm your identity. (checks or examinations made by a someone who is trying to confirm your identity.)

FICO® score = payment history
+ outstanding debt + length of credit history
+ pursuit of new credit + types of credit in use

Calculating FICO® score

1st tier: Emergency funds (10%)
2nd tier: Rent or mortgage (shelter)
3rd tier: Utility bills (water electricity telephone)
4th tier: Food and medicine
5th tier: Insurance bills and transportation
6th tier: Clothing and entertainment
Last tier: Non- essential for daily living expenses (vacation, restaurant...)

Employer withholds money your paycheck to pay someone you owe money to.

Wage garnishment

Credit counseling or negotiate with creditors to accept less than the amount due on the debt.

Getting help managing your debt

Plan to reduce debt.

Debt management plan (DMP)

An economic concept that describes the act of buying things not for their practical value but as a status symbol. In a nutshell, it is when consumers buy goods and services for the purpose of impressing others in hopes of improving their social status.

Conspicuous consumption

The middle class.

The one who has borrowed and owes money.

The one who has issued credit and is owed money by the debtor.

It is the last option for consumers who are in deep financial debt. The two most common types of bankruptcy for individuals are Chapter 7 and Chapter 13. Bankruptcies are usually named for their respective sections of the U.S. Bankruptcy Code, Title 11. The laws about bankruptcy also are included in this code and in Federal Rules of Bankruptcy Procedure. Bankruptcy stays on your credit report for 10 years and makes it difficult to get a loan, a credit card, a job, or even life insurance.

Chapter 7 of the U.S. Bankruptcy Code provides for "liquidation"
(i.e., selling a debtor's nonexempt property and giving the proceeds
to creditors).

Chapter 13 provides for adjusting the debts of an individual with a regular income. Chapter 13 allows a debtor to keep his or her property and pay debts over time, usually three to five years. Click on each title to see the process for filing a Chapter 7 bankruptcy. (unlike in chapter 7, chapter 13 debt is paid off, over the course of 3-5 years.)

Other bankruptcies:
Chapter 11: Filed by businesses
Chapter 12: Farmer or fisherman with regular annual income.
Chapter 15: Ancillary and other cross border cases.

Two main types of bankruptcy

A person who reviews the debtor's petition and works to pay creditors.

A court action that releases debtors from any personal liability for most debts. It also prevents creditors from attempting to collect the amount owed from the debtor.

A creditor can file a petition of involuntary bankruptcy against a debtor only under Chapter 7 or Chapter 11 of the Bankruptcy Code. The exceptions are if the individual is a farmer, a family farm, or a corporation that is not a commercial corporation.

Creditors must meet certain requirements. One requirement is that the debtor must have 12 or more creditors who are owed money and, through at least 3 of these 12 creditors owed, have a total debt over $13,475. At least 3 creditors typically file a petition; the more creditors that file a petition, the likelier the creditors will receive their owed money. However, if a debtor has fewer than 12 creditors who are owed money, and has a total debt over $13,475, then just 1 creditor can file a petition. Single creditor petitions are very rare because they are risky and do not usually result in the creditor receiving money.

Once the petition is filed, a debtor has 20 days to respond. He or she can dispute the claim, and the creditor(s) must prove the debtor consistently does not pay bills on time.

The court decides what comes next. If the court dismisses the petition, the case will not proceed, and the creditor may be forced to pay the debtor's court and legal fees. If the creditor's petition is accepted, the court enters an order of relief, and the case proceeds under Chapter 7 or Chapter 11 bankruptcy.

There is a period of time called the "gap period," which begins when the creditor files the petition and the court makes its decision. During this gap, the debtor can operate a business but cannot sell business assets, unless it is a necessary and usual part of normal business operations. Creditors might even have to offer credit to the debtor during this gap period.

The debtor does have a chance to rehabilitate his or her business during this gap period. This would benefit all involved—the debtor gets the business back on its feet and is able to repay creditors.

Key points of involuntary bankruptcy

Someone who files a lawsuit with an attorney.

A party in a lawsuit.

When a lawyer offers free legal advice to a litigant.

This incentive provides a material benefit for a consumer or producer to act in a certain way. It is a financial incentive if the material reward is money. For example, maybe your parents said you would get $50 for earning an A in this course. This is a type of positive incentive.

Remunerative incentive

This incentive contains a threat of penalty for failure to act in a certain manner. For example, going to jail is a coercive incentive for not committing a crime. This is a type of
negative incentive.

Coercive incentive

This incentive is possible when certain beliefs are commonly held. Actions that support these beliefs make people feel better about themselves and help gain approval from society. Donating blood is one example. Potential blood donors have a moral incentive to donate because they believe it is in the best interest of society and is a good thing to do.

Moral incentive

An economic model that factors the costs of negative externalities into the pricing of goods and services.

True Cost Economics

A value that can be expressed by adding the other goods and services associated with the original purchase.

Accounting cost

Step 1: Determine the PROBLEM to be solved or choice to be made.
Step 2: List the ALTERNATIVES.
Step 3: Establish CRITERIA.
Step 4: Use the criteria to EVALUATE each alternative.
Step 5: Make your DECISION.

PACED decision model

Goods that are beyond the basic needs of food, water, shelter, and clothing.

Discretionary goods

Targeted and Non-Targeted Advertising, Product Packaging and Pricing (Features, colors, logos, unit prices, and multipack prices), Relationship Management (long-term relationships with customers), Product Branding.

Marketing strategies

Promotions, appeals, red herrings, attempts to divert attention from a problem or limitation of the product, arguments from authority figures (celebrities), false either/ or statements, straw-man attacks on competitors.

Advertising strategies

Enforced by the Fed it makes sure banks and other institutions offer detailed information about terms and costs of credit for products such as mortgages.

Truth in Lending Act

Monitors anti- competition practices and trading.

Federal trade commission (FTC)

Someone who rents a house or apartment.

The state law that addresses tenant-landlord issues.

Virginia Residential Landlord and Tenant Act (VRLTA)

Let another person move into your rental residence and take over the lease.

Defines the obligations of a landlord to make repairs.

Virginia Residential Landlord and Tenant Act (VRLTA) Handbook

Virginia's central agency that protects tenants rights.

Consumer Protection Section

Contact this agency if you think your landlord has discriminated against you.

Virginia Fair Housing Office

Contact this organization if your landlord refuses to make safety-related repairs.

General District Court

If a landlord ignores safety-related repairs, they can be fined by this office.

Local Building Inspector

The Consumer Protection Section is part of this office.

Office of the Attorney General

Protect buyers when sellers try to deceive or mislead them.

Consumer protection laws

Contracts cannot be automatically renewed (I think).

Part of the Federal Trade Commission, helps protect consumers against unfair, deceptive, fraudulent business practices, identity theft, fraudulent marketing and advertising practices, and unfair financial practices. It also educates consumers about their rights under consumer protection laws.

Bureau of Consumer Protection

Part of the Department of Labor, enforces laws that help protect workers from death, injury, or sickness.

Occupational Safety and Health Administration (OSHA)

Presented as non-profit groups, but they are actually funded by private financial groups promoting a certain agenda.

Astroturf groups

It has been around for a long time, it publishes who funds them, it has many members, it is a non-profit.

Characteristics of an unbiased social group.

Thieves go through your garbage to find documents with your personal information.

Dumpster diving

Identity thieves send you e-mails in the name of banks, companies, or government agencies, trying to trick you into giving them your personal information.

Dishonest salespeople use a special device that records (and steals) your credit or debit card information as they process your card.

Occurs when a dishonest person with computer skills uses software to break into your e-mail and online accounts to obtain your information.

This one needs no nickname! Identity thieves steal whatever information they can get their hands on—wallets and purses, mail, pre-approved credit offers, new checks, etc.

The most basic type of account a bank offers; your money is insured and typically earns interest over time. Depending on the amount of money in the account, a savings account can earn between .20% and 2% interest, depending on the type of institution providing the account.

Savings account

Very similar to a savings account except that it is easier to withdraw money in the form of a check or an ATM transaction.

Checking account

Another type of savings account that banks and credit unions offer. The interest earned is based on the interest banks make on short-term investments. These accounts differ from regular savings accounts because they typically earn higher interest but also have higher minimum balance requirements (sometimes $1,000 to $2,500).

Money market account

Share in the ownership of a company. As a stockholder, you are a part owner of a company and have a claim to a portion of that company's assets and earnings.

Sort of a loan from you to a company or a government. When you purchase a bond, you are lending money to that entity for a defined period of time and at a fixed interest rate.

Businesses can use corporate bonds, city and local governments can issue municipal bonds, and the federal government can issue U.S. bonds and treasuries

Selects various stocks and bonds it believes will perform well overall. An investor can then buy shares in the mutual fund rather than the individual stocks that make up the fund.

Mutual fund company

Promise potentially high yields but have been rated as high risk due to the increased likelihood of loan defaults or poor business performance.

Inflation of the value of a business or product.

Monies that represent a collection of investments that provide income.

Not very liquid because it can't be sold out at any time.

Certificate of deposit

Occurs when a scammer joins or poses as a member of a group to get close with other members to scam them.

Similar to a pyramid scheme in that scammers get money from new investors to pay back people who invested earlier.

The SEC's mission is to protect investors; to maintain fair, orderly, and efficient markets; and to facilitate capital formation. Congress established the SEC in 1934 to restore investor confidence during the Great Depression.

Securities and Exchange Commission

Fiscal policy, including government tax policies, can affect tax-deductible expenses and, as a result, influence financial planning. These tax policies change over time.
Monetary policies—which are enacted to promote stable prices, moderate long-term interest rates, maximize employment—also can affect personal financial planning.

Fiscal and monetary policies

What is the health insurance provided through Social Security for people 65 years of age and older?

Medicare is health insurance for those 65 years or older, or, for those who have a permanent disability. There are three main components to the benefits.

Part A covers inpatient hospital care and some follow-up care. No extra payments are required. A person is eligible to apply for Part A at 64 years and 8 months, even if that person is not planning to retire.2
Part B covers physician's services, some hospital costs (that are not covered by Part A), as well as medical supplies necessary to treat deseases or conditions. Part B is optional and a monthly premium is charged for this plan.
Part C allows a person who is covered by both Part A and Part B
to choose a health care provider from which to receive these
medical services.
Part D is prescription drug coverage. There is an optional extra charge for this, too.

Social Security Disability Insurance (SSDI)
This disability program is for workers (and certain family members) who paid into the Social Security system for a certain amount of time, making them eligible for benefits. These benefits include a monthly check and the use of Medicaid.

Supplemental Security Income (SSI)
SSI came into being in the 1970s. It is a program for people who have limited financial resources. Recipients must be at least 65 years old or have a disability (such as blindness). The benefits include a monthly check and health insurance. Very specific health and income guidelines restrict eligibility. This benefit is based on financial need; it does not matter whether the person has paid into the Social Security system.3

An investment plan that is an agreement between an individual and an insurance company. Basically, an individual puts money into the plan, and the insurance company guarantees a steady stream of income, usually on a monthly or quarterly basis, during the person's retirement. It is an insurance policy that guarantees steady income.
The money in the account is not taxed until the individual begins to receive checks during retirement-that is, the money is tax deferred.

One type of annuity is an Individual Retirement Account, or IRA.
There are different types of IRAs.

Individual retirement account

Can be set up by an individual as a retirement account or an annuity account. The contributions are tax deductible up to a certain amount.

One of the main benefits of the Traditional IRA is that you can deduct the amount of the contribution from your taxable income, so you pay less in taxes the year you make the contribution. However, you will still have to pay taxes at whatever time you withdraw that money;

The biggest negative aspect of the Traditional IRA is that you must pay a high penalty fee for early withdrawal. Another potential negative is that
you cannot contribute any more money to it once you reach 70.5
years of age.

Traditional IRA

Can be set up by an individual. The annual contributions are not tax deductible, like the Traditional IRA. But, if you meet the qualified distribution guidelines set up by the Internal Revenue Service, the money will be tax free when you withdraw your contributions. Income guidelines prohibit some individuals from contributing to a Roth IRA. For example, a single filer with a modified adjusted gross income (MAGI) of $120,000 or less per year can contribute. Those with higher incomes cannot. One of the main benefits of a Roth IRA is that you can pay more money into it than you can pay into a traditional IRA. Another benefit is you can pay into the account no matter how old you are, whereas the Traditional IRA has an age limitation.

Can be set up by an employer, who then makes the contributions. In general, this type of IRA allows people to set aside the largest percentage of money for an IRA account without paying taxes until it is withdrawn. Not all employers offer this type of plan.

Simple IRA (Savings Incentive Match Plans for Employees)

Can be set up by an employer,
who makes contributions toward an employee's retirement. Or, self-employed individuals can set up their own SEP. The SEP allows people to set aside larger amounts of money than they could with only a Traditional IRA or a Roth IRA.

SEP IRA (Simplified Employee Plan)

A TSA is a type of annuity in which employees make contributions. The money is taken out of the employee's pretax income automatically, reducing that person's taxable income. Employers can also make contributions to this plan, and it is considered a fringe benefit of the job. When the employee takes money out of this plan, it is taxed.
One type of annuity, covered by the Internal Revenue Code's Section 403(b), offers the employees of certain nonprofit and public education institutions the benefit of a tax-sheltered retirement saving plan. Because these annuity plans are tax-sheltered, investments are
deferred from taxes.

Tax-Sheltered Annuity (TSA)

A Keogh plan (also known as an H.R. 10 plan) is a retirement plan for the self-employed or for those in unincorporated businesses. Through these plans, money can invest in the same securities as a 401(k) or IRA-including stocks, bonds, certificates of deposit, and annuities. Keogh plans can be accessed by people as young as 59.5 years old without penalty; withdrawals must begin by age 70.5. The advantage of a Keogh plan is that the contribution limits are higher, which makes them desirable among business owners and proprietors. The disadvantages are that they require more paperwork and that the maintenance costs are greater than those of SEP plans.

Many employer retirement plans include a matching contribution. This means the employer matches the amount you, the employee, puts in, up to a certain amount. Many of these plans mandate that you work at a company for a specified time period before you can participate. This is called being "vested" in the plan. Once you are eligible, or fully vested, it is a beneficial type of plan because it offers an automatic way to save through payroll deductions; plus, your employer contributes.

Employer Retirement Plan

Public pension plans are provided for people employed by the federal, state, or local governments. These include police officers, firefighters, teachers, and other public employees. In the past, public pensions were a great benefit for government workers. However, some government employees are not required to pay into the Social Security system.
Thus, in exchange for their public pension, they may retire to a lower monthly Social Security check or to none at all.

Public Pension lan

Someone who is entitled to receive the property of a deceased person by law or through a legal document.

A person who has been named to receive income from an insurance policy, a trust, a will, or another type of asset such as a bank account.

When a person dies without a will. The estate goes through a legal proceeding called probate, and the court appoints an administrator who determines what assets the deceased had and how to distribute them.

Distributes the estate assets according to the instructions in the will.

A property right in which two or more people own property together. Each person has equal rights and equal responsibilities regarding the property.

Trusts put conditions on how and when your assets will be distributed after you die. A goal of setting up a trust is to minimize the tax burdens for beneficiaries and to avoid probate court.

Allow people to put their assets in a trust while they are living. They still control the assets and can make changes to the specific details of the trust at any time. They do not have to get permission from the beneficiaries of the assets to make these changes.

Living trusts, also known as inter-vivos trusts or revocable living trusts

Transfer assets into a trust when a person dies. This trust must go through probate because the transfer occurs after death.

Testamentary trusts

Revocable, like inter-vivos trusts, or irrevocable. With an irrevocable trust, changes cannot be made unless the beneficiary approves.

Types of trusts

The person authorized to take over your decision making must first prove you are incapacitated.

Springing power of attorney

The person you select does not have to prove you are incapacitated and can act on your behalf at any time.

Durable power of attorney

A medical power of attorney.

Health care proxy

Appoints someone else to act on your behalf and to follow your health care wishes if you are incapacitated.

Advanced medical directive, also known as a living will

Exempts from taxes any assets you leave in your will to your spouse.

Marital deduction

You must pay an estate tax if the value of the assets exceeds a certain amount. If the amount you inherit is less than this predetermined amount, you do not need to pay taxes on it. This is known as an exclusion.

Anything left to someone in a will.

An investment bank will help a corporation sell its stock to its investors.

When a corporation sells stock for the first time.

Initial public offering (IPO)

When the investment bank sells the stock to investors and transfers the funds to the corporation.

The corporation is no longer receiving money from the sale. The stock is changing hands between only a buyer and a seller. Opposite of primary market.

Secondary market

This lists the highest price for the stock in
the last 52 weeks.

This lists the lowest price for the stock in
the last 52 weeks.

This is the name of the company, which often
is abbreviated.

A unique series of letters identifies each stock. A stock ticker is an electronic display of stock purchases and sales. Years ago, ticker symbols and prices were printed on long, narrow pieces of paper called ticker tape. Now, you know why parades in New York City with paper raining down are called "ticker tape" parades!

This refers to the annual dividend payment shareholders receive based on each share owned. This space is left blank if a company is not paying dividends.

Dividend per share

This is the percentage return on investments provided by dividends over the last year.

This is the current stock price divided by the earnings per share for the last four quarters. P/E ratios are one way to evaluate how a company has performed in the past.

Price-to-Earnings Ratio

This figure shows the total number of shares traded for the day. (Place "00" at the end of the number to find the number
of shares.)

This is the highest price paid for the stock that day.

This is the lowest price paid for the stock that day.

This is the final price of the day. The stock listing is shown in bold type if the closing price changed by more than 5% compared to the previous day's closing price.

This is the change in the stock's price from the previous day's closing price. A stock is considered "up" if the net change was positive and "down" if it was negative.

A request to purchase shares of a particular stock.

Specifies an upper price or a lower price when the broker should buy or sell.

Allows a transaction to be executed manually on the trading floor (as above) or by electronic trading via computer.

An electronic method of sending buy and sell orders directly to the trading post for a particular stock.

designated order turnaround (DOT) system

Traded directly between two parties rather than through a broker or other third party.

Buys and sells trades automatically.

Small order execution system (SOES)

Ar not regulated by SEC but are like mutual funds.

Stocks, property investments, and hedge funds.

High risk investments

The amount of protection the insurer will provide.

Most insurance policies are "pay as you go," with payments, called premiums.

People who have insurance.

Basic health insurance, Major Medical Expense Insurance, Dental and Vision Care Insurance, and disability insurance.

Types of health insurance coverage

What It Covers: Basic health insurance covers some medical expenses—hospital care, surgery, and physicians' care, including annual physicals, up to a certain point.

What Is Not Covered: For major health emergencies, such as a long-term illness or serious injury, additional coverage is needed. Eye care and dental visits are not typically covered by basic health insurance.

Who Needs It: Pretty much everybody needs basic health insurance. It helps cover the costs of regular doctor visits and routine tests as well as some surgery and short hospital stays.

Basic Health Insurance

What It Covers: Major medical insurance covers hospital expenses and costs that are not covered by basic health insurance. This insurance covers major hospital expenses and costs above a certain deductible—the amount of money you have to pay out of pocket before your insurer pays any expenses. Some basic health insurance covers the costs of major medical deductibles. Major medical insurance could require the policyholder to pay up to a certain amount—often up to $6,000.

What Is Not Covered: Major medical insurance does not cover visits to the doctor, prescriptions, or routine tests. Dental and vision care are also not covered.

Who Needs It: Also called catastrophic care, major medical insurance is for people who can handle the costs of day-to-day health care—annual checkups, prescriptions, and so on but want to be covered in the event of a major medical problem. Young people, self-employed workers, and senior citizens often purchase major medical insurance instead of, or in addition to, basic health insurance because they want to protect themselves from the excessive costs of a major illness or a serious injury.

Major Medical Expense Insurance

What It Covers: Dental and vision care insurance policies are generally sold separately from basic insurance and major medical expense insurance. Dental insurance covers typical dental procedures, such as annual exams, cleanings, X-rays, fillings, oral surgery, and orthodontics. Vision care insurance covers examinations, eyeglasses, contact lenses, and eye surgery.

What Is Not Covered: It does not cover visits to your regular doctor or major surgical and hospital expenses.

Who Needs It: People who regularly visit the dentist or eye doctor need these insurance policies. Dental and vision care insurance policies are about maintaining good health. By covering regular checkups, these policies help people take care of their teeth and eyes. Regular checkups, in turn, can help prevent other health problems later. People with vision problems definitely benefit from having vision care insurance. It is good to have dental insurance even if you are young and even if you brush and floss your teeth every day.

Dental and Vision Care Insurance

What It Covers: Also known as disability income insurance, this insurance provides income for people who cannot work because they have been injured in an accident or have become seriously ill.

How It Works: Disability insurance is a policy you hope you never to have to use. With disability insurance, the insurer pays you benefits after you have claimed a disability but only for a certain amount of time. Also, you must wait an agreed-upon time period (up to six months) before the insurer will begin making payments. Unlike health insurance, the terms of your policy are based on your income. When you purchase your policy, you calculate how much money you would likely need to support yourself and your family if you became disabled. This amount is usually about 70% of your gross pay.

Who Needs It: Disability insurance is a good idea for anyone whose entire livelihood comes from working at a job. In the event you could not work at any job because of injury or illness, you would need the income provided by disability insurance. People who support families or elderly parents often carry disability insurance just to be on the safe side.

Disability Insurance

Conditions that affect something.

Networks created by doctors and hospitals. They make deals with insurers, such as agreeing to charge their members lower rates in exchange for insurers providing coverage—if they approve the rates.

Preferred Provider Organizations (PPOs)

Provide its members with comprehensive health care benefits. HMOs hire doctors to provide health care to member patients. This arrangement means that doctors do not have to wait for patients' private insurance companies to pay them.

Health Maintenance Organizations (HMOs)

Refers to health care plans, like HMOs and PPOs, that try to reduce costs by setting up rules for doctors and patients to follow.

Statistical experts who collect and compile data about life expectancy.

The 7/70 Method (70% of income for 7 years), The 50% Method (half of your debt load relatively small)), and The Single-Parent Method ($10,000 for each year until the youngest child reaches age 18.)

Methods to calculate how much you need for life insurance

Term and permanent.

Types of life insurance

Also called temporary life insurance because you hold the policy for only a short time (1 to 30 years), not for your entire life. For example, you might want to carry life insurance during key periods in your life, such as when your children are young, when you have a mortgage, or when you owe a large debt or loan. Most term life insurance pays benefits only if the person being covered dies during the term of the policy. If the person outlives the policy, the insurer pays nothing unless the policy has a special option called a return of premium.

Term life insurance

This policy allows the owner to pay a locked-in premium rate for a period of 5 to 30 years.

Fixed-Rate Level Term (or Straight Term)

This policy's coverage decreases each year, but the premiums stay the same.

Decreasing Term

This policy pays off loan debts in the event of the policyholder's death.

This policy is renewed annually, but the premiums increase yearly.

Annual Renewable Term

Covers a person's entire life, and when that person dies, the insurer pays out the death benefits to the beneficiary.

Permanent life insurance

A policy where the owner pays a fixed premium. Upon the policyholder's death, the insurer pays benefits to the beneficiary. The amount of the benefits depends on when the policy was started and how long the premiums were paid.

Whole Life Insurance, straight life, ordinary life, or cash value life insurance.

Different from whole life insurance in a few key ways. First, the policyholders take on most of the risk. As a result, they can face premium hikes that cover the insurer's costs. In addition, the interest rate on the cash value is not fixed. This can be good if interest rates go up but bad if they fall. Insurance experts recommend universal life insurance policies to people who need flexible plans. Universal life policies allow people to adjust their premiums. They can pay as much or as little in premiums as they wish. They can also raise or lower the death benefits. The policies can also serve as tax shelters, where policyholders can stash their money while interest rates are high and not pay taxes on the interest until later. This policy is for people who stay on top of financial news and who want to manage their money and insurance policies actively.

Universal life policies

Policies essentially allow policyholders to play the stock market. With variable life policies, part of the policy's cash value can be invested in stocks, money market funds, or bonds.

Variable life insurance

So, now that you know what permanent life insurance policies involve, let's go back to the question of why you might want to convert a term policy to a permanent one. Permanent life insurance offers a way for policyholders to protect their assets and to build cash value. Plus, the premiums are cheaper. Term insurance is like renting an apartment. When you stop paying the premiums, you have nothing. You do not have any coverage and do not get anything back—there are no death benefits if you do not die, and it has no cash value. As they get older and their lives get more complicated, some people might see a benefit in switching from term to permanent life insurance. This is called a conversion option. This switch allows people to to pay the same premium without submitting to a medical examination or risking qualifying for a permanent policy.

The Conversion Option

Type of Policy Details
whole life period covered: lifetime
cash value: yes
premium: $125 per month
credit life period covered: three years
cash value: no
premium: $75 per month
annual renewable life period covered: one year
renewable cash value: no
initial premium: $900 premium that increases 10% each year
conversion option: yes
variable life period covered: lifetime
cash value: yes
premium: variable cash value, depending on the premiums paid in and the performance of investments

Type of Policy Details

Protects you from paying the full legal or medical expenses of someone who is injured. (If you cause the accident)

Bodily injury liability insurance

Protects you from financial losses in case you damage another person's property with your car. (If you cause the accident)

Property damage liability

Refers to a quantity of liability coverage. (ex. 50/25/10)
Your insurer will pay up to the first amount to all people in the accident.
Your insurer will pay up to the second amount to one person in the accident.
Your insurer will pay up to the third amount for property damage.

Instead of spending time and effort trying to get the insurer of the at-fault driver to pay your bills, you can ask your own insurer to pay.

No-fault insurance

This pays the medical bills you and your passengers incur after a car accident.

Medical Payments Coverage

With uninsured or underinsured motorist protection, you can ask your own insurer to pay. Keep in mind that this protection covers only injuries, not property damage.

Uninsured or Underinsured Motorist Protection

Covers the costs of getting your car repaired. With collision insurance, it does not matter who caused the accident.

Collision insurance

Your insurer pays the repair costs without considering whether someone was at fault. This insurance covers damage not caused by a collision.

Comprehensive Physical Damage

Special coverage for catastrophic events.

This insurance helps them financially protect their assets in the event of a lawsuit.

Professional liability insurance

Cover you against personal injury claims and attempts to damage your reputation through slander or libel (untrue statements about your character expressed in public or in print, respectively). Many umbrella policies cover an individual for liability up to $1 million or more.

Umbrella policy

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