COA 4131 Exam 1 Study Guide Chapters 1 5 chapter 1 a college graduate can expect to earn twice as much as a high school graduate over a lifetime half of job seekers find jobs through personal referral personal finance is how people spend save invest and protect their financial resources personal finance starts from day 1 because parents can apply for their baby s social security number on the day of birth personal finance is important to study because of the slow growth in personal income and of changes in the labor market and the stock market personal financial planning is the process of managing your finances to reach goals and to increase personal satisfaction o 3 steps setting financial goals creating and activating action plans and monitoring evaluating and revising plans 1 setting financial goals should be based on values principles that guide behavior and attitudes likes and dislikes goals are the end results and should be o flexible o realistic o specific and measurable o prioritized o action oriented opportunity costs what a person gives up in order to have or do something else the cost of what is given up risk the possibility of experiencing harm suffering danger or loss o in personal finance the loss of or lack of money income risk losing a job or other source of income inflation risk if your investments are not earning more than the cost of living increases each year you are losing purchasing power inflation a rise in price levels over the last 20 years the inflation rate has averages about 2 per year interest rate risk changing interest rates can have a negative effect on your investments liquidity rate some investments are more difficult than others to convert into cash 1 liquidity how readily something can be converted into cash personal risk health safety status risk clothing neighborhoods brands and cell phones convey images time risk how long can you afford to put off saving should current needs be met before future savings are addressed o risk aversion the avoidance of risk 2 creating and activating action plans involves decisions about managing assets credit insurance investments and retirement possible actions staying on course expanding cutting back embarking on a new course 3 monitoring evaluating and revising plans to keep up to date on your financial situation you should completely evaluate your financial plan at least once a year economics the study of the economy how wealth is created and distributed and the forces of supply and demand wealth the total value of all items owned financial and tangible assets financial assets intangible includes paper assets savings and securities stocks and bonds tangible assets physical assets homes computers cars anything with commercial or exchange value owned by an individual or organization 4 key players in the economy consumers government business media o 1 consumers o 2 government participate in the economy when they spend invest save or react to information about products and services average propensity to consume percentage of each dollar of income that an individual spends on average for current consumption consumption the using up of goods and services level of living current state of living standard of living quality of life one seeks implies prosperity mediates regulates the consumer business media exchange and provides services the federal government is the largest single employer in the USA collects taxes to provide services Federal Reserve System USA s central bank regulates US monetary systems including maintaining an adequate money supply by influencing borrowing interest rates and the buying and selling of government securities o 3 business provides goods services and employment commercial industrial and professional circulates money as part of the free enterprise system 2 supply and demand exist in a highly competitive market that is regulated by government and consumer demand o 4 media print newspapers magazines direct mail and outdoor broadcast radio television cable the internet primary goal is to attract attention average person is exposed to 250 1000 ads per day the economy follows a cycle with a wavelike motion economic cycle periodic expansions and contractions in economic activity o 4 stages expansion recession decline depression recovery expansion preferred stage with prosperity when unemployment is low and retail sales and economic activity are growing consumers buy expensive items since interest rates and inflation are low and employment is high when the book went to print the US had been in an expansion stage since 1990 recession temporary slowing of the economy when unemployment is higher than desired and economic activity is slow a recurring period of decline in total output income employment and trade usually lasting from 6 months to 1 year consumers are cautious about spending decline depression an undesirable downward trend featuring high unemployment 10 of working age population unemployed and economic growth at a standstill the Great Depression consumers have reduced purchasing power and confidence recovery things start looking better the nation is emerging from a recession or depression the level of unemployment is lessening retail sales improve the economy is moving upward hopeful stage consumers start buying more and have more confidence in the economy indicators in the direction of the economy inflation the index of leading economic indicators the consumer price index interest rates the Gross Domestic Product o inflation refers to rising prices devalues money and hurts people on fixed incomes o Index of Leading Economic Indicators LEI composite index averaging 22 components of gown from different segments of the economy released every month by the US Commerce Department s Bureau of Economic Analysis falling index over a 3 month period indicates a decline a climbing index is an indicator of prosperity growth 3 o consumer price index CPI measures the average change in prices consumers pay for a fixed basket of 400 good s and services published each month by the Bureau of Labor Statistics in the Department of Labor moves up and down as the rate of inflation changes o purchasing power the amount of goods and services an individual s o interest rates the cost of borrowing money usually expressed as an money can buy annual rate key factor in deciding when to borrow money for major purchases because you would rather pay a lower interest rate o Gross Domestic Product GDP market value
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