Module 2 Practice Exam V14 Answer Key 1. B: Regressive taxes impact lower incomes more than higher incomes. Regressive taxes lessen as income increases. 2. D: Gross income is before taxes are taken out. Net income is after taxes are taken out. 3. B: Progressive – as income increases, so does the tax rate. 4. B: to earn a profit, your interest rate must earn more than the rate of inflation. If the interest rate is less, you are losing purchasing power, thus not making the investment worth it. 5. C: Faisal is willing to accept high and moderate risks and Torie will not take aggressive risks. Stocks and futures are aggressive risks while a money market account is a conservative risk. 6. A: Fixed interest rates are the safest. Credit card 2 has the lowest fixed interest rate. 7. C: Variable costs are ones that change each month; it is best to cut back on the variable costs to balance your budget. Fixed costs cannot be reduced. 8. A: Clothing and entertainment are both variable costs and can be reduced by 5% each. This will allow for 10% to be saved each month. 9. A: they each are paying the same percentage in taxes. They are each paying 10%. Remember in a Proportional tax system no matter how much you make you pay the same amount in taxes 10. C: The younger you are the more aggressive investments your portfolio can handle because you have more time to make up money should something happen to your portfolio. Stocks are considered an aggressive investment and 70% of the portfolio you can infer that this portfolio is a young investor. 11. B: If Andrew can look at the variable expenses each month those that are not consistent like entertainment and gifts he can start cutting back on those things he does not truly need and save money to afford to go back to school. Remember fixed costs are expenses that do not change on a monthly basis such as rent and utilities. 12. C: The subject has many years before they hope to use their investment, they can choose a more aggressive option. 13. B: Since this would be considered a large purchase, installment loan would be the best choice because it allows you to pay back with fixed monthly amount 14. A: Sales tax is not paid directly to the recipient, but is rather paid to the store, who then turns around and provides the tax to the government. 15. C: Samantha is nearing retirement, therefore, needs to reduce risk in her investments. IRAs, CDs, Checking and Savings accounts all are considered low risk. 16. B: A Certificate of Deposit enable you to determine the length at which you want to invest your money and guarantees a certain rate of return at a low risk because it is FDIC insured. 17. A: mortgages and auto loans are normally installment loans with fixed interest rates; therefore, monthly payments will remain constant throughout the lifetime of the loan. 18. A: Fixed expenses cannot be changed without changing contracts (ex: yearly lease) and are part of a budget that cannot be changed. 19. D: Young investors have time to recover losses if they lose money in investments. Older investors do not have time for long term investments or to recover losses if they lose money. 20. B: proportional taxation results in a flat tax rate for everyone, while a progressive tax systems tax more as income increases.
21. (B) In a Regressive tax system. Chris would pay a higher percentage in taxes because his salary is less than She’Kira’s. For example, Chris would pay 30% and She’Kira would pay 15%. 22. (C) Because retirement is so close, you should be conservative in your investing 23. (C): $7.75x30= $232.50, $232.50x52=$12,090, $12,090x.20= $2,418, $12,090- $2,418= $9,672 24. D – Stocks are an aggressive investment and mutual funds are a moderate investment. These two meet Jamie’s wish for investments that could have moderate to high returns. 25. C – To calculate taxes here, you will multiply 45,000 by .15 (15% tax rate). 26. D – A variable expense is an expense that may change each month. Housing, utilities, and transportation are all fixed expenses – they remain the same each month. When making an adjustment to a budget, you will make changes to your variable, not fixed, expenses. 27. D: a stock would be too risky, and bonds usually require some length of purchase or use of the money. Savings accounts usually provide a lower interest rate. Money markets would allow Jose the opportunity to continue to add to his fund, or withdraw without penalty. 28. D: rent is the largest expense an individual should budget for. 29. A: Service credit is required for utilities 30. C: The question is asking about GROSS income, not NET and therefore the tax rate is not an essential part of the question-eliminate that. To calculate GROSS income you need yearly wages. 1. Multiply hourly rate x hours worked ($7.79 x 20=$155.80). 2. Multiply weekly wages x # of weeks worked ($155.80 x 35=$5453.00) YEARLY wages=GROSS income=$5453.00 NET income if you had been asked would have been $5453.00-15% ($817.95) =$4635.05 GROSS = $5453.00 NET = $4635.05 TAXES = $817.95 TIP: Know what your question is asking before you do any calculations. 31. A: Each system studied in the lesson is represented on this graph. Tax plan A is a progressive system. Tax plan B is a regressive system. Tax plan C is a flat or proportional system. Proportional Taxes-tax rate is the same for all income levels. Regressive Taxes-tax rate decreases as additional income is earned. Progressive Taxes-tax rate increases as additional income is earned. *In the United States of America we use a Progressive tax plan in which those who earn more assume more responsibility for the costs of the government thus “redistribution of wealth”. 32. B: This portfolio consists of 1 conservative option, the IRA, but mostly moderate -aggressive investments (the bonds, mutual funds and stocks). A person who is looking for risk and a long term investment period is best suited to this portfolio because any losses could mean time to recoup whereas others (such as the middle aged professor, young couple, or older person) who is looking to use their investment in the near future would not want to take such risk. **A younger person usually is the best suited to take risks and an IRA is a good conservative option as it will grow over time and has tax benefits. This portfolio is well rounded for a long term retirement goal.
