Quiz | January 2011

Economics 101

The economy is all over the news lately. But do you really know how our nation's economy works or how it affects your pocketbook?

We've pulled together a basic ten-question test on economic principles. See how you fare:

Quiz

Economics 101

Question 1 of 10

What is the overall measurement of a country's economic activity?

A. Consumer confidence
B. General debt productivity
C. Gross domestic product
D. Purchasing power parity

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Economics 101

Question 1 of 10

What is the overall measurement of a country's economic activity?

You're right! C. Gross domestic product is correct.

Sorry, wrong! is incorrect.

The right answer is C. Gross domestic product.

The gross domestic product (GDP) encompasses everything the nation produces and consumes. If GDP declines, a red flag goes up because the economy could be in trouble. Both the Federal Reserve Board and Congress rely on GDP reports when formulating policies related to the economy.

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Economics 101

Question 2 of 10

The U.S. economy is in a significant recession. What's one definition of an economic depression?

A. A decline in GDP by at least 10%
B. Unemployment tops 5%
C. One in five Americans sees a psychiatrist

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Economics 101

Question 2 of 10

The U.S. economy is in a significant recession. What's one definition of an economic depression?

You're right! A. A decline in GDP by at least 10% is correct.

Sorry, wrong! is incorrect.

The right answer is A. A decline in GDP by at least 10%.

There are many factors that go into a depression, but according to The Economist, it generally means a decline in real GDP by at least 10%, or a decline that lasts more than three years. A recession, however, is defined as a reduction of the GDP for at least two consecutive quarters.

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Economics 101

Question 3 of 10

When it comes to your finances, falling interest rates are ...

A. Good for borrowers, bad for savers
B. Good for savers, bad for borrowers

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Economics 101

Question 3 of 10

When it comes to your finances, falling interest rates are ...

You're right! A. Good for borrowers, bad for savers is correct.

Sorry, wrong! is incorrect.

The right answer is A. Good for borrowers, bad for savers.

Falling interest rates are good when borrowing money because you'll pay less in interest charges. For example, it can make a good time to buy a home, refinance a mortgage or shop around for a better credit-card rate. However, falling rates are bad news for savers as the rate of return on savings accounts and CDs drop, too.

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Economics 101

Question 4 of 10

Why should you care about inflation?

A. It affects your purchasing power
B. It can affect the monthly payment on a fixed-rate mortgage
C. Because proper tire pressure can reduce gas costs

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Economics 101

Question 4 of 10

Why should you care about inflation?

You're right! A. It affects your purchasing power is correct.

Sorry, wrong! is incorrect.

The right answer is A. It affects your purchasing power.

Inflation, as measured by the Consumer Price Index, is the increase in the average price of certain goods. And as prices go up, your dollar buys less. For instance, 30 years from now, at an average annual inflation rate of 3%, $1 million will roughly have the same purchasing power as $400,000 does today.

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Economics 101

Question 5 of 10

Who controls monetary policy in the United States?

A. The President
B. U.S. Treasury
C. Federal Reserve

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Economics 101

Question 5 of 10

Who controls monetary policy in the United States?

You're right! C. Federal Reserve is correct.

Sorry, wrong! is incorrect.

The right answer is C. Federal Reserve.

Monetary policy involves regulating the country's money supply and interest rates to either stimulate or slow the economy. And that's the job of the Federal Reserve. The Fed manages open market operations (the buying and selling of government bonds), reserve requirements (the amount of money banks have to stash) and the discount rate (how much the Fed charges for loans to banks). However, these tools have proven ineffective for dealing with the current crisis, so the Fed has expanded its list of policy instruments to include such things as term auction and commercial paper funding facilities.

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Economics 101

Question 6 of 10

After dramatic increases over the past few years, home prices dropped in 2008 -- about 8% on average nationwide, and as far as 40% in some metro areas. What economic principle is at play?

A. Adverse selection
B. Supply and demand
C. Regression

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Economics 101

Question 6 of 10

After dramatic increases over the past few years, home prices dropped in 2008 -- about 8% on average nationwide, and as far as 40% in some metro areas. What economic principle is at play?

You're right! B. Supply and demand is correct.

Sorry, wrong! is incorrect.

The right answer is B. Supply and demand.

For years, demand for housing was on the rise, so prices rose, too. The supply of homes also was increasing. When availability of easy credit dried up and people no longer expected housing prices to continue their dramatic rise, demand disappeared. Because supply of housing is much less fluid, a glut of houses have been left on the market and prices have tumbled.

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Economics 101

Question 7 of 10

When the value of the U.S. dollar falls, what does that mean for your personal finances?

A. Overseas travel is more expensive
B. Imported goods cost more
C. Your foreign investments are worth more
D. All of the above

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Economics 101

Question 7 of 10

When the value of the U.S. dollar falls, what does that mean for your personal finances?

You're right! D. All of the above is correct.

Sorry, wrong! is incorrect.

The right answer is D. All of the above.

The downside of the falling dollar includes pricier travel and imported products. On the upside: If you invest in overseas markets or mutual funds, your money is worth more as foreign currencies rise against the dollar.

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Economics 101

Question 8 of 10

Generally, which is healthiest for the economy?

A. High inflation
B. Low inflation
C. Deflation

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Economics 101

Question 8 of 10

Generally, which is healthiest for the economy?

You're right! B. Low inflation is correct.

Sorry, wrong! is incorrect.

The right answer is B. Low inflation.

Some inflation is good for economic vitality. High inflation, however, is worrisome because as prices rise quickly, consumers stop spending. Deflation, or a sustained period of falling prices, also reduces economic activity because consumers have incentive to postpone purchases.

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Economics 101

Question 9 of 10

As unemployment rates rise ...

A. Paycheck values go up
B. U.S. exports increase
C. Home foreclosure rates rise

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Economics 101

Question 9 of 10

As unemployment rates rise ...

You're right! C. Home foreclosure rates rise is correct.

Sorry, wrong! is incorrect.

The right answer is C. Home foreclosure rates rise.

More homes go into foreclosure as unemployment worsens because people cannot afford to pay their mortgages. Possibly just as harmful as unemployment itself is the fear of losing a job because it leads people to postpone purchases of big-ticket items.

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Economics 101

Question 10 of 10

To decrease the national debt, U.S. consumers need to live within their means.

A. True
B. False

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Economics 101

Question 10 of 10

To decrease the national debt, U.S. consumers need to live within their means.

You're right! B. False is correct.

Sorry, wrong! is incorrect.

The right answer is B. False.

Although living within their means will do wonders for consumers' personal finances, it won't help the national debt. That's the responsibility of the federal government, which is also spending more money than it's bringing in. As of January 2009, the U.S. government was more than $10.6 trillion in the hole.

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Economics 101

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